Budget Review 2022–23 Index

Dinty Mather

The Australian Government raises money from taxes, custom duties, revenue from state-owned enterprises, and capital revenues (receipts). However, when it needs to spend more than it raises it must borrow money and incur sovereign debt (Australian Government debt).

The mechanism that the Australian Government uses to borrow money is the issuance of bonds and notes, collectively called Australian Government Securities (AGS). These are fixed term instruments paying interest at set intervals, called coupon payments, and finally refunding the face value after the term has ended, called the principal. Buyers usually include

• resident investors, such as domestic banks, superannuation funds, domestic hedge funds and the Reserve Bank of Australia (RBA)
• non–resident investors including foreign banks, pension funds, foreign hedge funds and foreign central banks.

Investors can then trade the AGS among themselves on the Australian Securities Exchange (ASX) commonly called the secondary market.

Types of debt

Statement 6 in Budget strategy and outlook: budget paper no. 1: 2022–23 gives the Australian Government’s current and estimated debt statement. Australian Government debt is expressed as two debt aggregates:

• gross debt, which is the face value of AGS on issue at a point of time
• net debt, which is the market value of AGS on issue less the sum of selected financial assets (cash and deposits, advances paid and investments loans and placements).

The face value of an AGS is a predetermined amount that the Australian Government agrees to pay when the term on the AGS expires. Regular interest, or coupon, payments on each AGS issue may be indexed to inflation in the case of Treasury Indexed Bonds. Once an AGS has been issued it can be bought and sold on the secondary market where the market value is determined by the demand and supply for AGS.

Past and forecasted Australian Government debt

Figure 1 shows gross debt and net debt since 2000–01 with estimates from Budget paper no.1 2022–23 (pp. 346–349) for 2021–22 to 2025–26. Due to improvements in the underlying cash balance, gross debt as a share of gross domestic product (GDP) is expected to be lower than was forecast at the Mid-Year Economic and Fiscal Outlook 2021–22. Despite this improvement, Budget paper no.1 2022–23 (p. 349) forecasts that in 2022–23 the value of AGS on issue will increase in nominal terms by $71.0 billion (3% of GDP) and by $192.0 billion (2.2% of GDP) between 2022–23 and 2024–25.

Figure 1       Gross debt as a percentage of GDP and net debt as a percentage of GDP

Sources: Parliamentary Budget Office, Historical fiscal data; Australian Government, Budget strategy and outlook: budget paper no. 1: 2022–23, Tables 10.4 and 10.5, 346–349.

Although gross debt shows the total AGS liability the Australian Government holds, net debt incorporates selected government financial assets and liabilities at fair value and thus provides a broader measure of the financial obligations of the Australian Government than gross debt. Table 6.7 in Budget paper no.1 2022–23 (p. 194) shows that AGS on issue in 2022–23 are forecast at $1 trillion. The $339.6 billion difference between AGS on issue and net debt includes:

• $36 billion in cash and deposits
• $836.6 billion in advanced paid
• $217 billion in ‘investments, loans and placements’.

Although the Australian Government has substantially increased its debt to fund elevated spending during the COVID-19 pandemic, in comparison to other advanced economies Australia’s net debt burden as a percentage of GDP is relatively low (see figure 2).

Figure 2       International comparison of net debt as a percentage of GDP during 2021

Sources: International Monetary Fund, Fiscal monitor, October 2021: Strengthening the credibility of public finances, Table 1.2, 5; Australian Government, Federal fiscal relations: budget paper no. 3: 2022–23, Appendix C, Table C.8, 9 (data for 2020–21).

Because the Australian Government has been increasing debt since the global financial crisis, the long term capacity to service debt in terms of paying interest and the principal out of receipts has become a topic of debate for commentators and the public.

Debt exposure and sustainability

All AGS are denominated in Australian dollars which allows more control and less risk on the part of the Australian Government than if AGS were, for example, issued in United States dollars. Non–resident holding of AGS indicates to some extent an exposure to risk, but because AGS are traded internationally in the secondary market the ultimate holders are not always known.

The Australian Office of Financial Management (January 2020) has provided information on the AGS investor base. Figure 3 shows the distribution of AGS held by resident and non–resident investors. Of the $888.4 billion AGS on issue as at 30 June 2021, 49% are non-resident investors, 21% are held by the RBA and 30% are resident investors.

Figure 3       Debt exposure to resident and non–resident holders of AGS

Sources: Australian Government, Australian Office of Financial Management, Data hub, Non–resident holdings of AGS; Reserve Bank of Australia, Statistical tables, Holding of Australian Government Securities and semis.

The RBA holds an increasing portion of AGS and semi-government securities (semis), which it has bought in the secondary market during the COVID–19 economic disruptions. Noting that the RBA is independent from the Australian Government, it bought large quantities of AGS and semis in conjunction with using a variety of other monetary policy tools, designed to increase liquidity and lower interest rates to stimulate the domestic economy (quantitative easing), as well as to maintain orderly functioning in the Australian bond market. The RBA continues to purchase AGS and semis in the secondary market in efforts to assist a return to full employment and a target rate of inflation.

The ability to service gross debt and to reduce it in the future through taxation and other revenue has become a concern to many. The question, generally, is whether Australian Government debt is too big to ensure a safe and sustainable economic future. Figure 4 displays the past, current and estimated interest cost to the Australian Government of servicing AGS on issue. Budget paper no.1 2022–23 (p. 349) shows that the interest cost of servicing AGS on issue during 2021–22 is about $17.5 billion and is estimated to rise to $26.3 billion by 2025–26 in nominal terms. The Australian Government can service the interest paid on AGS by issuing new AGS.

Figure 4       AGS interest cost

Sources: Parliamentary Budget Office, Historical fiscal data; Australian Government, Budget strategy and outlook: budget paper no. 1: 2022–23, Table 10.5, 348–349.

The Parliamentary Budget Office (PBO) fiscal sustainability research report (April 2021, p. 8) highlights three main factors that influence the trajectory for gross debt relative to nominal GDP (debt to GDP ratio) and thus also the ability to service debt without undue economic stress. These factors are:

• higher average interest rate on the stock of AGS, in particular new issues and indexed AGS, will generate higher interest payments on debt
• if nominal GDP grows and the average interest rate on the stock of AGS grows less quickly than nominal GDP, the debt to GDP ratio will fall
• a surplus in the budget balance, which depends on the performance of the economy and Australian Government policies, means that debt can be paid down leading to a lower debt to GDP ratio.

The PBO publishes updated forecasts and modelling on the debt to GDP ratio, among other indicators, in its fiscal projections and sustainability reporting.

Based on current forecasts in Budget paper no.1 2022–23 (p. 6) nominal GDP is expected to rise across the forecast period resulting in a significantly improved underlying cash balance, which is expected to stabilise debt financing requirements and result in a steady debt to nominal GDP ratio from 2024–25 onwards. Economic growth, as expressed in real GDP growth, is also expected to increase in the forecast period which should contribute towards a lower debt to GDP ratio through the underlying cash balance.

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