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

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Shares

Exploiting Warren Buffett

Growth investors are using Buffett to justify buying blue chip stocks at almost any price. It’s a recipe for potential disaster, as investors in market darlings like CBA and Cochlear may be about to find out.

Property

Population density trends and what they mean for housing

With Australia’s population moving through the fastest rate of growth since the 1950s, our cities and towns are naturally densifying. This is a look at the latest trends and how they will impact the property market.

SMSF strategies

The ultimate superannuation EOFY checklist 2024

We're nearing the end of the financial year and it's time for SMSFs and other super funds to make the most of the strategies available to them. Here's a 24-point checklist of the most important issues to address.

Shares

The outlook for Nvidia, from a long-time investor

Nvidia has taken the world by storm and is now the third largest stock on the planet - larger than Meta, Amazon, and Alphabet. Here is the latest take on Nvidia from a fund manager who first invested in the company in 2016.

Economy

Gross National Happiness?

Despite being richer, surveyed measures of happiness have been flat to falling in Australia. Some suggest we should focus less on GDP and more on broader measures of wellbeing, though there are pros and cons to that approach.

Shares

The power of dividends

In an era where growth companies dominate and the likes of Nvidia grab all of the attention, dividend paying stocks are flying under the radar. Some of these stocks offer compelling prospective returns.

Fixed interest

The best opportunities in fixed income right now

After more than a decade of pitiful yields, bonds are back offering better prospects for income investors. What are the best ways to take advantage of the market inefficiencies in Australian fixed income?

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.