Viewing debt as linked to GDP and government revenue shows we're in pretty good shape, despite the Coalition's claims

All political parties love a good catchphrase, and the government’s favourite at the moment relates to debt.

Ministers from Tony Abbott down love to note that we are paying “a billion dollars a month” in interest on our debt, and that they inherited a “record” amount of debt.

So let’s give those claims a bit of a look.



First, we have to remember that government spending, revenue and debt can always be related in a few ways.

The dopiest way is to use nominal terms. This is the way that ignores inflation and increases in population. As I noted when looking at the budget expenditure, it’s the best way to go if you want to show that you are spending more than you did last year.

It’s pretty stupid and should be used only by people who think that a house that sold for $200,000 in 1985 would sell for the same amount now.

But debt is also tricky because we can look at total debt and also look at interest payments; and we can also look at total debt in both gross and net terms.

Let’s start with total debt. I’ll mostly use net terms because talking in gross terms sounds good, but it’s like talking about how much you spend each month without considering how much you earn.

There is no doubt that if we use nominal terms government net debt is at a record level. The recent budget papers have it at $226.4bn, absolutely miles above the $96bn the Howard government inherited in 1996.



But, really, let’s not be stupid and use nominal terms; we’re a bit smarter than that, surely?



The problem with looking at government expenditure in real terms (i.e. adjusted for inflation) is that it doesn’t make much sense either over the long term.

This is because our economy grows faster than inflation. And a good thing too, otherwise real GDP growth would be zero. It grows faster than inflation because not only do we get more productive, our population grows as well.

In 1985, Australia’s population was about 15.8m; now it is 23.5m. So even without inflation it’s not surprising that a government would spend (and tax) more now than it did then.

But prices do also rise – in the past 20 years inflation has grown 69% while our GDP has increased about 240%.

So the best way to look at government expenditure, revenue or, in this case, debt over time is to look at it as a proportion of GDP. And on this score the level of net debt of 12.5% of GDP is well below the record level of 18.1% reached in 1995-96: (Use the drop down to see differences.)

But I also think looking at debt as a proportion of GDP can be a bit misleading – after all, the government’s income is not the entire GDP of Australia. So I have also measured debt as a proportion of government revenue. On this measure, the 2013-14 level is about 54%, again well below the record level of 77% in 1995-96.

The good thing about looking at debt as a percentage of GDP or government revenue is it enables us to compare Australia with other nations (note in the graph I have not included Norway because its sovereign wealth funds rather skew the scale of the graph – its net debt is minus 201% of GDP):





And, yes, while our debt is low compared with others, I hear you say, what about our growth of debt? We can also look at this. And I have broken it down into 2007-2013 (to show the growth through the global financial crisis) and then 2013-2019 to see the future, and then 2007-2019 to get the big picture. And finally I show what the situation is projected to be in 2019:

Yes our debt is currently projected to be among the fastest rising over the next six years, but we still end up having one of the smallest debts in the advanced economic world.



But what about interest payments? Again, we can use the nominal figures, which suggest we’re paying record amounts – $10.7bn in 2013-14:

Or we can use again the more honest measures of proportion of GDP or revenue and see that the level of interest payments is well below what we had to pay in the 1980s and 1990s – even when our total debt was higher.



The reason for this is the interest rate the government is paying on its debt is much lower now. In fact it is much lower now than it has been for a very long time:



And it’s worth noting there is a lag time with interest payments, because if the government issues a bond for 10 years at 6.25% it pays that interest for 10 years even if the bond yield goes down during that time.

The Australian Office of Financial Management has a list of all the current fixed-price government bond issues. It comes to about $300bn. There is also $23bn in “indexed Treasury bonds” (these are bonds where the value of the capital is indexed to the consumer price index).

The list of the $300bn bonds shows the different terms and rates:



And it is here that we get to the “$1bn a month” figure. When the government uses this figure it is talking about the face value of the bonds – in effect the gross value.



The budget papers never used to show this value, but the Liberal party made a big kerfuffle about it while in opposition, and they have now included a table showing the face value of debt.

The face value is also important with regards to the “debt ceiling” and was why the government sought to change the debt ceiling last year from $300bn to $500bn (but in a deal with the Greens it removed the ceiling completely).



The interest payments on the face value of government securities (i.e. types of bonds) this year is $13.9bn – so about $1.1bn a month. And, yes, the payments are going to go up and up and up –but only in nominal terms. As a percentage of GDP, or of revenue, they are actually projected to be stable – or even fall slightly:

Now, I know none of this will change anyone’s view that our debt position is good, bad or irrelevant, but at the very least it gives us some proper context.

And, finally, for debt that might actually be worth worrying about, it’s worth remembering that private housing debt reached a record level in December:



And given the recent rises in housing prices, that is a debt which will continue to be a worry.

