Gregory O’Brien, Statistics and Mapping

Key issue

Australian Government debt has increased to levels not experienced since the 1950s as economic support during the COVID-19 pandemic led to increased budget deficits. As interest rates in Australia and globally have started to increase in response to recent inflationary pressures, both the size and servicing of this debt will be an issue for future Australian governments.

In Australia, and in countries around the world, government economic support packages in response to the COVID-19 pandemic have led to large increases in government debt, continuing a trend of increasing government debt since the global financial crisis (GFC). Over the pandemic, Australian Government gross debt increased from $534.4 billion in March 2019 to $885.5 billion in April 2022 and is now at the highest level relative to GDP (gross domestic product) since the 1950s when debt accrued during the Second World War was still on the Australian Government balance sheet (p. 8).

This article provides an overview of the structure of Australian Government debt, recent trends in the total amount of Australian Government debt outstanding, international comparisons of government debt, and the relationship between government debt and interest rates.

Australian Government debt issuance and key terms

Australian Government debt is closely linked with the Australian Government Budget. Government spending is funded either through receipts- primarily taxes- or through borrowing. In the Budget, the difference between receipts and payments is referred to as the cash balance and has been in deficit (payments have exceeded receipts) since 2007–08. These deficits have led to a steady increase in the level of Australian Government debt.

The Australian Office of Financial Management (AOFM) manages Australian Government debt issuance. The AOFM issues 3 types of debt securities, collectively known as Australian Government Securities (AGS):

• Treasury bonds: medium to long-term debt securities that pay interest at a fixed annual rate every 6 months. These are the largest type of AGS, representing 92.8% of AGS on issue as of 20 May 2022.
• Treasury indexed bonds: medium to long-term debt securities that include adjustments for inflation, as measured by the Consumer Price Index (CPI). Both the capital value and the interest payments are adjusted quarterly based on changes in inflation. These represented 4.1% of AGS on issue as of 20 May 2022.
• Treasury notes: short-term debt securities with maturations up to one year. These represented 3% of AGS on issue as of 20 May 2022.

The total face value of AGS on issue at a given point in time, which represents the total amount that will need to be repaid when all extant AGS mature, is used as a measure of gross debt in the Budget. The AOFM publishes a weekly figure for total AGS on issue, broken down into the 3 types described above, as well as more detailed information in its data hub.

While gross debt is a good representation of the total magnitude of outstanding debt, it may not be the best measure for analysing debt sustainability depending on the financial assets available to service or pay off this debt. For this reason, the Budget also provides figures for Australian Government net debt, defined as ‘the sum of interest-bearing liabilities less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements)’ (p. 347). These financial assets are primarily held in government investment funds, such as the Future Fund.

Whether gross debt or net debt is a better measure of government indebtedness will depend on the context of the analysis. The difference between these measures is described in more detail when looking at international comparisons of government debt below.

Trends in Australian Government debt

The Budget provides historical data for a range of budget aggregates back to 1970–71 in the Historical Australian Government Data statement of Budget paper no. 1 (Statement 10 in 2022–23). When comparing levels of debt across long periods of time, it is useful to convert the dollar values of debt into a relative measure, usually the ratio to GDP, to control for the impacts of price changes across the economy. Figure 1 below shows gross debt, represented by the total face-value of AGS outstanding, as a ratio to GDP over the last 50 years with the Budget estimates through to 2025–26 and the interest payments on this debt for the same period, also as a ratio to GDP.

Figure 1          Australian Government total AGS on issue (gross debt) and interest paid

Source: Australian Government, Budget Strategy and Outlook: Budget Paper No. 1: 2022–23, p.348.

This graph shows that Australian Government debt fluctuated around 20% of GDP from the early 1970s to the mid-1990s with one period of substantial falls in the late 1980s. Government debt then trended down between the mid-1990s and the GFC in 2007–08, as the Howard Government prioritised debt repayment and budget surpluses. From 2008–09 in the wake of the GFC and associated government economic support packages, government debt has steadily increased as a ratio to GDP, with 2018–19 the only financial year over this period which saw a fall in this measure. The 2022–23 Budget forecasts government debt to increase over the next few years before falling slightly in 2025–26 (p.348). In dollar terms, gross debt is forecast to increase to over a trillion dollars in 2023–24, reaching a peak over the forward estimates of $1.193 trillion in April 2026. While current and forecast debt to GDP ratios are high relative to recent history, they are still well below the peak reached following the Second World War of over 120% of GDP (p.8) (see Figure 2).

Figure 2          Australian Government gross debt to GDP ratio

Sources: pre-1970: A. Barnard, Source Papers in Economic History via Treasury and The Conversation; post-1970: Australian Government, Budget Strategy and Outlook: Budget Paper No. 1: 2022–23, p.348.

Note: There are differences in methodology between the sources, so some care should be taken in comparing recent and historical figures. The figures for 2021 - 22 to 2024 - 25 are Budget estimates.

These increases in the level of Australian Government debt since the GFC have not seen a commensurate rise in the amount of interest paid on this debt because interest rates on Australian Government debt fell over the period, largely offsetting the increase in the level of debt. This period of low interest rates has seen interest payments stay at historically low levels, around 1% of GDP, which is less than half the amount paid in the 1980s despite the current level of debt being twice the level of that period.

Interest rates on Australian Government debt have started to rise in 2022 and have continued to rise since the 2022–23 Budget was released in March. This increase has been common to many countries globally in response to inflationary pressures and tightening of monetary policy by central banks. If interest rates stay above the level forecast in the Budget, interest payments will increase over time as new debt is issued at these higher rates and existing debt that was issued at lower historical interest rates matures and is refinanced.

International comparison of General Government debt

Despite increases in Australian Government gross and net debt since the GFC, levels of both remain relatively low when compared to other countries. The International Monetary Fund (IMF) publishes data on General Government sector gross and net debt across countries. The IMF approach includes all levels of government (which, in Australia, includes Commonwealth, state and local governments), which allows more meaningful comparison across countries with different structures of government. Figure 3 shows IMF estimates of gross debt and net debt for 2021 across several advanced countries from the IMF’s fiscal monitor 2022 publication.

Figure 3          IMF General Government gross and net debt (% of GDP) estimates, 2021

Source: International Monetary Fund (IMF), Fiscal Monitor: Fiscal Policy from Pandemic to War, (Washington, DC: IMF, April 2022).

Figure 3 shows the important difference between gross debt and net debt when comparing across countries. Countries with significant financial assets, such as Canada (held by public pension plans) and Norway (held in a sovereign wealth fund) have much lower levels of net debt than gross debt once these financial assets are incorporated. This is also relevant to a lesser extent for Australia, where the $200 billion Future Fund and other smaller government investment funds have contributed to a widening gap between gross debt and net debt over time (p. 1).

There is variation across countries in the degree to which these financial assets are held to meet future specified expenditure purposes, and some debate as to whether it is appropriate to consider these assets as offsetting government debt. Gross debt is a more consistent measure across countries, as there is less variation due to different social security regimes.

As Figure 3 shows, despite the increase in both Australian Government net debt and gross debt since 2007–08, the level of government debt compared to international peers remains relatively low. At just below 60%, the Australian Government gross debt to GDP ratio is less than half that of the US, and less than a quarter that of Japan. Both gross debt to GDP and net debt to GDP ratios are lower than any G7 members, and similar to mid-sized economies including Korea and New Zealand.

Holdings of Australian Government Securities

Australian Government debt is owned by a range of Australian and international investors. The AOFM provides information on the share of AGS on issue owned by non-residents. Under the Guarantee of State and Territory Borrowing Appropriation Act 2009, the AOFM was tasked with establishing a Public Register of Government Borrowings. As the AOFM has no powers to compel financial intermediaries to disclose the beneficial owners of AGS they administer, the register has limited information on the countries of residence of foreign owners of AGS.

The Reserve Bank of Australia (RBA) started purchasing significant amounts of AGS on the secondary market as part of its monetary policy response to the COVID-19 pandemic in order to lower yields on government bonds and maintain liquidity in bond markets. This has led to the RBA holding a growing share of the total AGS on issue. The RBA ceased purchasing AGS in February 2022, and in its May 2022 Statement on monetary policy decided:

[…] the Board will not reinvest the proceeds of maturing government bonds and expects the Bank’s balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end. The Board is not currently planning on selling the government bonds that the Bank has purchased during the pandemic. (p. 3)

This decision means that RBA ownership of AGS should slowly recede as the existing AGS owned by the RBA mature. As total outstanding AGS is not forecast to decline, these maturing bonds will need to be absorbed by the resident and non-resident markets for AGS. Given the duration of these bonds, this process is likely to slowly occur over the next decade.

Figure 4 below shows the ownership of AGS by non-residents, the RBA, and other domestic owners. The chart shows resident holdings of AGS have steadily increased over the last decade, while non-resident holdings have fallen as a proportion of the total, and RBA holdings increased. The reduction in the proportion of AGS held by non-residents reduces the risk of interest rate volatility associated with capital flight, when non-resident investors sell overseas assets and repatriate the money, often in response to market volatility.

Figure 4          Resident, RBA, and non-resident holdings of AGS, 2003–2021

Source: Parliamentary calculations based on Australian Office of Financial Management, Non-Resident Holdings of AGS, and Reserve Bank of Australia, Holdings of Australian Government Securities and Semis

Government debt sensitivity to interest rate changes

The Australian Government Budget provides sensitivity analyses to show how varying certain important assumptions (particularly the iron ore price and yields on 10-year government bonds) would impact on the economic and fiscal forecasts contained in the Budget. For the 2022–23 Budget, the sensitivity analysis is contained in Budget paper no. 1, statement 7: forecasting performance and sensitivity analysis.

Yield sensitivity analysis models the impact on the gross debt to GDP ratio if interest rates over the medium term differ from those assumed in the Budget (the baseline forecast) while maintaining all other forecasts. The interest rate on 10-year treasury bonds is used as the benchmark rate. Figure 5 below shows the path of interest rates used by Treasury in the higher yield and lower yield scenarios in the left panel, and the impact these higher or lower yields would have on the forecast gross debt to GDP ratio in the right panel. If interest rates follow a higher yield path than the Budget forecasts, then the gross debt to GDP ratio will continue to rise for longer and fall slower than is forecast in the Budget.

Figure 5          Yield Sensitivity Analysis from Budget 2022–23

Source: Budget Strategy and Outlook, Budget Paper No. 1: 2022–23, pp. 215–216.

The market interest rate on 10-year Treasury Bonds in mid-May 2022 is over 3.25% and reached 3.5% for several days in early May 2022. If interest rates stay at levels above the level of 2.2% forecast in the Budget in March 2022, the gross debt to GDP ratio would be expected to be higher than the levels forecast in the Budget. However, it is important to note that the weighted average cost of borrowing on Australian Government debt responds slowly to changes in market interest rates, as the fixed-term nature of treasury bonds means that only new issuance (including the rolling over of maturing bonds) pays the higher current interest rate while the existing stock of debt continues to pay interest at the rate set when that debt was issued.

The sustainability of government debt

The increase in government debt to levels not experienced in generations raises questions about the sustainability of this level of debt. While there is no objective level of government debt to GDP which is problematic, there are several factors worth considering when analysing the sustainability of government debt.

When considering the Budget ramifications, reducing the debt to GDP ratio does not necessarily require Budget surpluses. If economic growth outstrips growth in the level of debt, then the debt to GDP ratio will fall even if the Budget is in deficit. As the Budget notes:

From a fiscal sustainability perspective, it is the difference between nominal yields and nominal economic growth that matters. If higher yields are accompanied by an economy growing at a faster rate than the rate on government borrowing, this may be sufficient to improve debt as a share of the economy over time, all else being equal. (p. 215)

The Parliamentary Budget Office (PBO) provides a Fiscal Sustainability dashboard as part of its fiscal projections and sustainability publications, which models gross debt to GDP ratios out to 2061 based on various scenarios for GDP growth, the Budget cash balance, and interest rates.

Whether Australian Government debt is, or will become, a problem depends on the future path of interest rates, economic growth, and the Budget balance. Interest payments on Australian Government debt reduce the amount of money available in the Budget for expenditure on government services, or requires additional debt to be raised to fund these activities. However, both international experience and Australian history show that countries can have higher levels of government debt than are currently prevalent in Australia for long periods of time without risking default or seeing a substantial decline in their credit ratings.

 

Further reading

Australian Government, Statement 6: Debt Statement, and Statement 7: Forecasting Performance and Sensitivity Analysis, Budget Strategy and Outlook: Budget Paper No. 1: 2022–23.

Parliamentary Budget Office (PBO), Fiscal Sustainability, (Canberra: PBO, 2021).

PBO, Beyond the Budget 2021–22: Fiscal Outlook and Scenarios, (Canberra: PBO, 2021).

PBO, Net Debt and Investment Funds – Trends and Balance Sheet Implications, (Canberra: PBO, 2019).

Katrina Di Marco, Mitchell Pirie and Wilson Au-Yeung, A History of Public Debt in Australia, (Canberra: Treasury, 2009).

 

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