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.

banner

Most viewed in recent weeks

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates

Shares

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.

Strategy

Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.

Retirement

What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.

Shares

Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.

Shares

Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.

Sponsors

Alliances

© 2024 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.