Tackling Australia’s Public Debt Problem 8 December 2016, by Tony Makin and Julian Pearce

Budgetary issues in Australia have dominated public policy discussion at the federal level since the 2008-10 Global Financial Crisis (GFC). Governments at both national and state level entered the GFC running budget surpluses, yet post-GFC Australia has experienced one of the fastest growing public debt levels in the world due to a series of historically large budget deficits that have persisted for longer than after previous economic downturns.

The Federal Government has overwhelmingly contributed to the escalation of Australia’s public debt because it has run more sizeable deficits than State Governments and been much less successful in reducing them.

Australia’s public debt to GDP ratio at around 30 per cent may not be high by OECD standards. However, not only has it been amongst the fastest growing in the world, it is mostly (around two thirds) owed to foreigners, unlike in other advanced economies. Foreign public debt also now comprises a sizeable component of Australia’s total private plus public foreign debt, which stands at over 55 per cent of GDP in net terms.

1. Key questions in the fiscal deficit and debt debate are:

2. Is higher federal spending or lower tax revenue driving the deficits?

3. What are the macroeconomic risks of ongoing federal budget deficits?

4. What level of public debt is optimal for Australia?

5. What fiscal consolidation is needed to stabilise and reduce Australia’s public debt?

This article briefly addresses these questions. In response to the first, Federal Government spending at 26 percent of GDP is running above its long run average since 1990 of 25 percent, while revenue remains slightly below its long run average of 24 per cent. Hence both are contributing to the ongoing deficits, although expenditure more so.

In answer to the second question, the main risk of failing to rein in the fiscal deficit is a downgrading of Australia’s AAA credit rating, which would add a risk premium to interest paid on government bonds. A 30 basis point rise in interest paid on government debt, for instance, would increase the annual federal public debt interest bill by some $1.5 billion, other things the same.
Read the full article at Austaxpolicy blog.