Australia should conquer its fear of government borrowing. This is a great time to spend on long-term projects

To explain Australia’s debt position the government has commonly compared it to a mortgage. Currently the net debt is around 10% of GDP, which is why Julia Gillard has suggested “our level of debt is the same as a person earning $100,000 a year with a $10,000 mortgage”.

It’s a good line that rather nicely explains the situation. Indeed, it’s a line I suggested the government should have used back in the 2010 election.

While it is a good line, it is also a bit misleading. Although measuring level of debt as a percentage of GDP is sensible and common throughout the world, the government’s income is not GDP. Income – or revenue – is only 23% of GDP.

If we look at the government’s net debt as a percentage of its own income, suddenly that mortgage grows to around $47,400 because government net debt is currently around $161bn, and total revenue is around $350bn. Net debt is approximately 47.4% of the government’s annual income.

The problem with comparing the government’s budget to that of a household is that when you and I worry about our mortgage, we don’t actually worry about the total size of the mortgage. You don’t sit around the kitchen table thinking, “How are we going to pay off this $400,000 debt?”

What people do worry about is the mortgage payments – those fortnightly/monthly payments that must be met.

Here is where the government’s net debt position really comes into focus: net interest payments are around $7.8bn a year.

Now that sounds like a hell of a lot ($21m a day), but it comes in at just under 2.1% of total revenue. To go back to the analogy of a person on a $100,000 income, that is the equivalent of having to pay $2,084 a year, or $80.15 a fortnight, in mortgage payments.

Not a lot.

Even if we use the gross debt amount of $12.9bn, the payments come in at only 3.45% of the government’s revenue.

But here’s the very interesting thing. Back in 1998-99 the government’s level of debt was approximately the same in terms of both GDP and a percentage of total revenue. Except instead of having to pay 2.1% of revenue in interest payments, it had to pay over twice that – around 5.7%.

Facebook Twitter Pinterest Graph of ratio of debt to revenue Photograph: /2013-14 Budget Papers

Why was this?

Well if you go over to the Australian Office of Financial Management website, you’ll see that last week the government raised $700m in bonds at the interest rate of 2.82%. This in effect means the government borrowed $700m at an interest rate of 2.82%. Back in 1999 the government would have had to pay an interest rate of around 5.14%.

That adds a heck of a lot to the interest payments.

This brings up another issue. In this past year, the government has been able to borrow money cheaper than at any time in the past 45 years.

Being scared of debt now is a bit like a householder not wanting to take out another mortgage to renovate their house because the interest rate is too low.

The price the government will have to pay for debt will inevitably go up. But at the moment we’re in a very unique situation of being one the few AAA rated currencies. And because the US and other major nations have bond yields at record low rates, Australia’s are also low.

This won’t continue forever.

Borrowing now to finance long-term infrastructure – train lines, major highways, ports, airports - is a smart play.

Clearly we don’t want to be silly about it. One of the reasons the government is able to borrow at such low rates is because our debt is low compared to the rest of the world.

Our fear of debt, engendered by one side of politics and sections of the media, has blinded us to the opportunities available.

Adding to our debt to funnel money to consumers, through tax cuts for example, would be madness – like taking out an extra mortgage to pay for a holiday. But borrowing at low rates to fund long-term infrastructure is like taking out an extra mortgage to build another bedroom onto your house – it adds capacity and value to your home.

And, if you can afford it now, you’ll be kicking yourself if in five years' time rates are double.