Australia’s government debt rose to a record $819 billion last week and the latest budget documents show it rising above $1 trillion in the next couple of years.
If that sounds like a big number, it is.
In 2007-08, gross government debt was around $50 billion.
In 2013, after the stimulus measures that saved Australia from recession during the global financial crisis, debt was $273 billion.
The latest data show that every household in Australia accounts for around $75,000 of government debt.
It must be emphasised that this is not a major concern today – everything including targeted government spending is needed to get the economy back on its feet in the wake of the COVID-19 pandemic.
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Fiscal policy must remain stimulatory as it helps to get the economy on a strong growth path and back to full employment.
Only then should the focus be on budget repair.
And there is more than a touch of hypocrisy in the policies and rhetoric from the Morrison government.
Treasurer Josh Frydenberg said that “your children don’t want us spending as much money today, because they’ll have to pay it back tomorrow”.
Yet, it has been the Coalition government that has instructed the Australian Office of Financial Management to issue bonds, that is borrow money, that will not be repaid until the 2040s and even 2050s.
And it has been the Morrison government that is in prospect of running at least 15 consecutive years of budget deficits driven in part by its policy of income tax cuts that are permanently undermining the ability of the budget to get to a surplus.
It is a similar thing with the commitment to have defence spending at a staggering high 2 per cent of GDP, even when global conflicts of relevance to Australia are tepid and other countries are cutting their superfluous defence spending levels.
These policies, rather than a possible extension to JobKeeper, for example, are the looming problem for the budget.
The Coalition government, which is in its eighth year of government, has generated a government debt time bomb that “your children” are already on the hock for and will have to “pay back” in the decades ahead.
A short history of government debt
Until the election of the Coalition government in 2013, there were no government bonds (government debt) that were borrowed for more than 15 years. This meant that all debt would either be ‘paid off’ or rolled over within a 15 year time frame.
The Coalition has changed this.
As debt has exploded to a record high, the government has locked in debt for up to 30 years.
That’s right, it has issued bonds that are not repaid or need to be refinanced until 2051.
It has also borrowed a huge amount of money for a duration of between 20 and 30 years, meaning that when that debt falls due, the government of the day will either need to run budget surpluses to ‘pay it off’ or it will have to roll that debt over and borrow again.
Of course, those budget surpluses will require our children and grandchildren to be paying more tax to fund the deficits and debt that are accumulating now.
As things stand, there is $15 billion of government debt due to mature in 2051. A child born today will be 30 years old, working hard and paying tax to pay that off.
In addition to this, there is a further $27 billion of government debt maturing in the period 2041 to 2047. There is a further $51 billion of debt maturing in 15 to 20 years time, and a further $184 billion between 2030 and 2033.
There is little doubt that the Australian government will be well placed to manage this debt, but it will need to implement budget repair when the economy is registering sustained strong growth.
There is also a huge threat that interest costs on that debt will surge as the rise in interest rates that began a few months ago.
The maths is simple.
A 1 percentage point across the board rise in interest rates on debt of $1 trillion will in time add $10 billion a year to the interest cost of that debt. 2 percentage points is $20 billion a year.
That is money that cannot be spent on health care, education, public transport or action on climate change.
The debt time bomb planted by Prime Minister Morrison and Treasurer Frydenberg will be difficult for future governments to diffuse.
It is an issue that will come into focus as we approach the budget in May, but more fully in the next few years when the economy has locked in a decent recovery and interest rates are rising.