We have this good friend who regularly tells us how much government debt has risen, the interest bill the country is paying and that the economy is therefore a disaster waiting to happen.
We explain patiently that it isn’t as bad as he’s describing and he always replies with a glib one line response he has picked up from some conservative right-wing commentator on TV.
But of late the “government debt crisis leading to our ruin” myth seems to be spreading as conservative politicians and commentators preach doom and gloom.
So let’s explain the facts once and for all about Australia’s government debt and put it in perspective.
A BIG NUMBER
First up … yes Australia is in debt. According to our mate, government debt stands at $536 billion. It’s a big number isn’t it? 536 thousand million dollars.
But the size of our economy is big as well.
The value of Australia’s gross domestic product (products and services we produce each year) is valued at $1.42 trillion.
Think of GDP as the income the country earns a year … 1420 thousand million dollars.
You see it’s pretty naive to quote government debt levels without comparing them to the earning ability and growth of the economy.
While debt has grown, so has the size of the Australian economy, and at a world-class rate.
From the last economic recession in 1991-92 until last financial year, the Australian economy has grown on average 3.2 per cent a year — well ahead of the US (2.5 per cent), Britain (2.1 per cent), France (1.6 per cent), Germany (1.4 per cent) and Japan (0.9 per cent)
Despite all the doomsayers, Australia’s economy has been outperforming most of the world’s industrial powerhouses.
Australia’s government debt as a percentage of GDP is currently around 41 per cent but has risen 25 per cent since the Global Financial Crisis in 2009.
Yes, that increase has to be addressed because only Spain and Japan have had a bigger debt increase in the period, as other countries have tried to slow or reduce debt.
Hopefully the latest figures showing an early return to Budget surplus will slow our debt increase.
The International Monetary Fund is forecasting it will drop in the next five years.
Even so, our government debt as a proportion of GDP is less than half the level of most major industrialised economies such as Japan (236 per cent), Britain (86 per cent), Germany (60 per cent), the US (108 per cent), Canada (86 per cent) and France (96 per cent).
BORROW TO GROW
“All that means is that we’re the best of a bad lot, shouldn’t we have no debt?” we hear you say. And you make a good point.
Yes, debt has to be at manageable levels but given the size of our economy, our relatively small population and our big infrastructure projects we’ve always had to borrow to grow.
The key is making sure it’s good debt, invested in projects that add value to the economy.
A better, and more realistic, indicator of how manageable out debt levels are is to use the “net debt” measure.
For example, when you or the bank measures your personal net debt position they’ll start with your loans and then offset that amount with savings, investments and money owed to you.
If you have $100 of debt but $30 in savings, $20 in investments and $10 owed to you the net debt position is $40.
It’s the same with a government. The Future Fund, for example, has $146 billion invested and the Reserve Bank is a government investment that pays a dividend each year and holds about $2 billion on government bonds
When all this is taken into account Australia’s net debt position is just 19 per cent of GDP.
Against the rest of the world we are, again, in pretty good shape.
As a single number that $536 billion in debt is big.
But so is the size of the Australian economy and the value of government investments.
Government debt is always an issue … but it’s nothing to panic about at these levels.
HAVE A SMART XMAS
It’s Christmas crunch time as we balance the financial perils of the festive season.
Here are our top tips to ease the burden and keep your debt under control:
1. Gifts that don’t cost: Be creative in your gift giving. Many parents with younger children will appreciate your gift to babysit while they spend time alone. Do you like dogs and cats? A gift certificate to a pet owner for walking or grooming will be appreciated.
2. Sneaky shopper: If you don’t catch up with family until after Christmas, do all your shopping at the Boxing Day and New Year sales. You’ll save a bundle not only on gifts but also the table decorations.
3. Use a debit card: All banks now offer debit cards, which can be used in the same way as credit cards except you’re using your own money in your own account rather than someone else’s and paying an exorbitant interest rate for the privilege. It’s a great way to keep your Christmas budget on track. Once the money’s gone, it’s gone.
4. Earn extra cash: Summer can be a great time to turn that hobby into a money spinner. If you love knitting, craft, cooking or whatever, start a stall at the local markets or sell through local shops to earn a little extra cash to help survive Christmas. Stash the extra cash away to pay for Christmas festivities or for when the January credit card bill comes in.
5. Shop online: If you can’t afford the time to shop around and compare prices, do it online. It saves time and battling the maddening Christmas melee around the cash register.
Originally published as The real story about government debt