New analysis indicates that Australia's federal and state debt is projected to reach levels comparable to World War Two proportions, potentially impacting public services and living standards.
Debt Projections and Implications
A report by the economic think tank e61 Institute projects that Australia's combined federal, state, and territory government debt could reach 37 percent of the nation's Gross Domestic Product (GDP) by 2028. This would mark the highest level as a share of the economy since World War Two.
Michael Brennan, CEO of the e61 Institute, stated that increasing debt levels could limit the government's capacity to invest in various sectors, such as health and education, potentially requiring reductions in other services like policing.
Drivers of Rising Debt
Public expenditure has seen a significant rise, increasing from 34.7 percent in the early 2000s to 38.2 percent in 2024, covering spending by federal, state, and territory governments.
Social services constitute the largest expenditure area, accounting for approximately one-quarter of total outlays. This includes welfare benefits, childcare assistance, and the National Disability Insurance Scheme (NDIS). Health ranks second, followed by education.
Per capita health expenditure has doubled since 1999, while education spending has remained stable. The report suggests this expansion in social spending stems from a shift away from tightly means-tested benefits towards 'in-kind' support, such as the childcare subsidy and the NDIS, which have broader recipient eligibility.
Brennan indicated that rising debt is partly due to universal systems that do not employ means testing, describing them as expensive and inefficient. Others contend that universal services enhance access, reduce stigma, and can yield long-term economic and social benefits.
Potential Solutions
Brennan suggested that tax reform and spending restraints are potential strategies for the government to reduce debt. He also noted the need to identify areas within current systems for building savings, such as operating programs with fewer physical staff.
Understanding Government Debt
Flavio Menezes, an economics professor at the University of Queensland, explained that countries incur debt to finance budget deficits when government spending surpasses revenue from taxes and royalties. Budget deficits can be necessary, such as for financial support during major shocks like natural disasters or pandemics to stimulate the economy.
Conversely, a budget surplus in conjunction with a robust economy can mitigate inflationary pressures and reduce debt by preventing government demand from displacing private demand.
Menezes noted that global 'shocks' of recent years complicate debt management. These include the energy transition, the financial crisis, the COVID-19 pandemic, population aging, slowing global trade, and increasingly fractured geopolitics.
Debt Creditors
Government debt is primarily owed to investors, both domestic and international, rather than directly to other governments. In Australia, borrowing occurs mainly through Commonwealth Government Securities (bonds and Treasury notes) and State 'semi-government' bonds.
Creditors include:
- Domestic institutional investors (superannuation funds, banks, insurers, asset managers)
- Foreign private investors (overseas pension funds, insurers, global asset managers)
- Foreign central banks (holding Australian government bonds as foreign exchange reserves)
Implications of Increased Debt
Menezes stated that public debt levels are likely to remain structurally higher due to ongoing global uncertainty and government efforts to support citizens through economic fluctuations. He indicated that higher public debt is, to some extent, unavoidable.
Increased public debt can affect the economy through several channels:
- Rising interest payments may reduce essential public spending over time.
- Political constraints may limit governments' future ability to adjust fiscal policies, particularly if debt growth outpaces economic growth.
Ultimately, the impact of debt depends on how it is utilized. If public debt finances productive investment and supports long-term growth, it may not undermine living standards. However, if debt funds low-return spending in a low-growth environment, it could exert sustained pressure on future incomes, public services, and living standards.