Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 380

Are debt and its servicing cost serious worries?

The world is swimming in debt, as high as it had been before the GFC in 2008, with government debt-bingeing establishing all-time records due to the mishandling of COVID-19 health-wise.

The world is heading for a debt level of 300% of GDP or more, Japan is nudging 400%, and four other countries are heading over 300% in 2020. Among the big 10 economies, our nearest neighbour - Indonesia - is the least indebted with less than 100% of GDP.

Australia joins the debt party

Until March 2020, Australia was relatively well-behaved, with a total debt of less than 250% of GDP. Our government debt, at 37% of GDP in 2019, was only bested in the developed world by Switzerland at 26%. The main risk was our household debt (mostly mortgage debt) at 120% of GDP.

All that changed with the announcement in the first half of 2020 that we would be spending $360 billion to fight COVID-19, despite there being less deaths from the pandemic than normal respiratory deaths (mainly the over-70s age group) in previous years.

On the Budget night, the cheque book came out again. Now we have prospects of a government debt of $1.7 trillion by end 2024, or over 80% of GDP. That would put Australia’s total debt closer to the 275% of GDP mark.

Is this serious? Yes, but not debilitating.

The economy will almost surely suffer more from the shutdowns, and general deprivation of commerce and liberty, including the controversial border closure of 2020. Around 1-in-7 businesses shut down in good years, or some 280,000 businesses of the total 2.3 million. That share may rise to 1-in-5 or 6 for a year or two.

Debt versus servicing costs

Debt is always less of an issue than its servicing cost be it as a share of government revenues, business revenues or household disposable incomes.

So, interest rates are just as important as the debt levels. The chart below provides perspective on government debt servicing costs via the 10-year government bond rates across various countries.

Australia’s bond rate means that, even if it climbed back to 2% by 2024, it would only account for 5% or less of all government revenue (taxes and other income).

The next chart shows the long history of 10-year bond interest rates, which have averaged 5.5% over the past 150 years, but are now less than 1% and seemingly at a record low.

But when converted to real interest rates, by deducting inflation, we are far from a record low. Indeed, there have been at least 15 years when the real interest rates were lower than in 2020.

What all this means is that the debt and its servicing is probably less of a problem than repairing and re-building the wrecked economy, especially in Victoria.

We can service the debt. But of course, if and when bond rates go back to 5% (a long way off it would seem), governments will pray for higher inflation for several years to dilute the debt mountain. That’s what happened in the 1950s, when inflation (including one year at 25.25% in 1953) diluted the WWII national debt of 110% of GDP to a very manageable share of GDP.

More serious than debt

The more serious problems for the next 5-10 years are:

  • How to get the economy back on its feet and restore our standard of living (GDP/capita) back to the March 2020 level before 2025.
  • What to do differently with the next pandemic, bound to arrive well before the end of this decade.
  • How to restore our international trade in the huge and fast-growing Asia region with the problems and tensions there, from COVID-19 (closed borders), trade wars and hegemony.

We need better long-term vision, innovation, reforms (I have covered the subjects of parliamentary, labour market, taxation and commerce reform previously), statesmanship and management than we have had over the past 10-15 years or more. And that goes for corporate Australia too: we are lagging well behind world best practice (WBP) innovation, performance and profitability.

That said, who of us would prefer to live elsewhere in this extraordinary and turbulent world of the third decade of this 21st century?

 

Phil Ruthven AO is Founder of the Ruthven Institute, Founder of IBISWorld and widely recognised as Australia’s leading futurist.

 

RELATED ARTICLES

Australia’s default: who do you rescue?

Rising bond yields complicate the COVID recovery

Biden is stimulating an economy already enjoying a sugar hit

banner

Most viewed in recent weeks

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Latest Updates

Investment strategies

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Economy

A pullback in Australian consumer spending could last years

Australian consumers have held up remarkably well amid rising interest rates and inflation. Yet, there are increasing signs that this is turning, and the weakness in consumer spending may last years, not months.

Investment strategies

The 9 most important things I've learned about investing over 40 years

The nine lessons include there is always a cycle, the crowd gets it wrong at extremes, what you pay for an investment matters a lot, markets don’t learn, and you need to know yourself to be a good investor.

Shares

Tax-loss selling creates opportunities in these 3 ASX stocks

It's that time of year when investors sell underperforming stocks at a loss to offset capital gains from profitable investments. This tax-loss selling is creating opportunities in three quality ASX stocks.

Economy

The global baby bust

Across the globe, leaders are concerned about the fallout from declining birth rates and shrinking populations. Australia, though attractive to migrants, mirrors global birth rate declines, and faces its own challenges.

Economy

Hidden card fees and why cash should make a comeback

Australians are paying almost two billion dollars in credit and debit card fees each year and the RBA wil now probe the whole payment system. What changes are needed to ensure the system is fair and transparent?

Investment strategies

Investment bonds should be considered for retirement planning

Many Australians neglect key retirement planning tools. Investment bonds are increasingly valuable as they facilitate intergenerational wealth transfer and offer strategic tax advantages, thereby enhancing financial security.

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.