Aussie debt is about to top half a trillion

Thu, 15 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: 


Aussie debt is about to top half a trillion dollars

Australia’s government debt is poised to break through half a trillion dollars. As of last week, it stood at $0.4992 trillion.

Half a trillion dollars, is $500,000,000,000.00 of gross debt on which the government will be paying interest of around $15 billion each year – and that assumes that interest rates remain at the current record lows.

Government debt has been on an upward path since the global financial crisis hit the economy in 2008. The GFC saw a significant fiscal stimulus where government spending increased substantially as it delivered enough support so that Australia avoided a recession. It was text book economics but the price of avoiding recession was a rise in government debt.

More recently, structural changes in the economy have seen chronically weak wages growth and below target inflation locked into the landscape. These trends have undermined government revenue at a time when government spending is still running well above the levels prevailing before the GFC. Efforts of the government to cut its spending is recent budgets have not only failed, but spending is actually rising at a strong rate.

As a result of all of this and some reckless pre-GFC policies that wastefully sprayed money around the economy, the budget has been in deficit since 2008-09 and is set to remain in deficit until at least 2019-20. And while ever the budget is in deficit, gross government debt keeps rising.

Half a trillion dollars of government debt is a new record and according to last month’s budget papers, government debt is set to hit $725 billion in the mid-2020s. Government debt was ‘just’ $273 billion at the time of the September 2013 election when the Coalition promised to return the budget to surplus and ‘pay off’ debt. It has failed in this policy.

What is concerning is that the $725 billion debt forecast assumes the budget moves to surplus by 2020-21 and stays there after that, which is a scenario that just about everyone other than Treasury judges to be unlikely For now, the government is having no financial management problems raising debt. Australia’s triple-A credit rating is safe for now, which ensures fund managers and others are willing to finance the ever growing levels of debt at the current level of interest rates.

And while a credit crunch where investors shun Australian government debt is unlikely to show up any time soon, if the level of debt rises at a significantly faster pace than currently forecast and there is a credit rating downgrade or two, investors will be less willing to lend to the government at current interest rates.

In other words, an unexpected debt blow out from already elevated levels because of a slump in housing or protracted weakness in commodity prices or some other issue would not only see debt rising more quickly, but interest costs escalate. At the same time, the Australian dollar would almost certainly fall, and by a large amount, which would push import prices and inflation higher, which in turn would erode living standards.

While the half trillion dollars of government debt is not yet a problem, a point could soon emerge where the government will need to take action to address the debt escalation. It appears that economic growth is not enough to fix the budget and control the debt level.
This means that tax hikes and / or spending cuts will be needed in the not too distant future. This might be best achieved when, one day, the economy is stronger.

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As house prices fall across Australia, should we be worried for our economy?

Tue, 13 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

Trump could cause the next global recession: here's how

Wed, 07 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.