Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 202

Government debt: how much is too much?

The 2017 Federal Budget has turned attention as usual to the issue of government debt. Commonwealth governments ran a surplus during the mining boom from 2003-2008 but it has run deficits since the GFC to prop up employment and growth. The deficits have been funded by running up $500 billion (and rising) in debt. Is this too high? Can we afford it?

The first chart shows the history of annual Commonwealth government balances since Federation. The bars in the top section shows the annual government balance each year. We can see that surpluses (green bars) have been rare indeed. The pink bars in the lower section show debt as a percentage of national output (GDP) each year. The current level of debt at 25% of national output is higher than it has been since 1959.

The government ran rare surpluses during the mining boom from 2003-2008 thanks to high commodities prices but since the GFC a succession of big-spending governments have run up deficits to prop up employment and growth. Strategically timed spending sprees on ‘pink bats’ and ‘school halls’ meant we narrowly avoided an economic recession (arbitrarily defined as two consecutive quarters of negative national output growth), but the cost was a build-up of national debt that will take decades to repay.

 

Is the current debt to GDP ratio too high?

The main debt build-ups were due to the massive deficit spending in the two World Wars. The ratio of debt to national output also increased during the 1930s depression but it was not because of big spending and borrowing, it was because of the massive contraction in national output.

In the first half of the 20th century, Australia was seen as a high-risk borrower in global debt markets, suffering a default and full-scale Greece-style debt restructure in 1931. Australia regained respectability as a borrower in global debt markets after the post-war economic boom reduced debt in the 1950s.

The current level of Commonwealth government debt relative to national income is not high in historical terms but it is high in post-war terms. It is lower than almost every other country in the world today - but that doesn’t make it right. The current $500 billion pile of federal government debt is costing tax-payers $16 billion per year, or $44 million every day, or $1.70 per person per day. This sounds a lot but there is more to the story.

More important than the level of the debt is the affordability of the debt. The second chart shows the cost of servicing government debt in the upper section of the chart.

Government debt Click to enlarge

Here we see the cost of interest on this debt as a percentage of national income (GDP) in the red line and also as a percentage of government receipts (mainly tax revenues) in the black line.

The current interest burden is modest and affordable, at 4% of government revenues and just 1% of national income. This is lower than almost any other time since before World War 1, and lower than almost every other country in the world today. Market yields on government bonds have been rising since the middle of 2016 after the Brexit vote but are still at low levels. Rising bond yields don’t translate into higher interest payments until each bond matures in the future and is re-financed by another bond at a higher rate, which in some cases is 30 years into the future. Even if bond yields rise rapidly the interest cost will remain low for many years.

 

Based on affordability, the current debt is manageable

If the Commonwealth government were a company the board would be sacked for having a ‘lazy balance sheet’ and not borrowing enough to invest in productive assets for future growth.

But here’s the problem. Investing for the long-term future requires coherent vision, long term commitment and willingness to make tough decisions. These critical qualities have been sadly lacking in the recent succession of short-term revolving door governments in Canberra.

I don’t see this improving any time soon. Voting power continues to drift in favour of the aging population of people who have not saved enough for their retirement, at the expense of the young who will have to pay for the deficits for decades to come. The current addiction to debt and fear of electoral backlashes from painful reforms will probably continue. But why worry? About every 30 years, a mining boom comes along that delivers freakish commodities prices and windfall revenue gains.

The windfall revenue gains from the last mining boom were squandered on middle class welfare that is proving extremely hard to wind back. Let’s hope our kids and grand-kids handle the next one better.

 

Ashley Owen is Chief Investment Officer at privately-owned advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

  •   18 May 2017
  • 3
  •      
  •   
banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years under the retirement income covenant, regulators warn a growing gap between leading and lagging super funds, driven by poor member insights and patchy outcomes measurement.

Shares

Australian equities: a tale of two markets

The ASX seems a market split in two: between the haves and have nots; or those with growth and momentum and those without. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business model isn't sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.