Posted 13/04/2011 by Alan Payne
The Parliamentary Library has published an update on Australia’s debt levels—please see
Australia’s current debt position – update July 2012.
In recent times a lot has been spoken about Australia’s level of debt. This was no more evident than in the lead up to the last Federal election where it seemed to dominate debate. Terms like net and gross debt were thrown around with no real understanding of what these terms actually mean. Therefore, in this article I aim to not only report on Australia’s current debt situation, both public and private, but also shed some light on what is actually meant by these terms.
When describing debt, the most often reported term is net debt. Net debt, simply stated, is the sum of all liabilities (gross debt) of a corporation or government less their respective financial assets (cash and other liquid assets). In the case of Australia, net debt is the sum of all liabilities of all corporations and all governments (local, state and national) less their total financial assets. This debt can be either funded overseas (foreign), domestically or a combination thereof.
Net debt therefore, provides a quantitative measure for the degree of debt held by a corporation, a government or a country but is just one measure used to determine their overall financial health. For example, if a government has a large of amount cash and or assets and a large amount of debt it would be better able to handle its debt situation than a government that has a small amount of debt but limited cash or assets.
In comparison, gross debt is the amount of money owed by corporations, governments and countries. It is an absolute measure and only indicates the magnitude of debt owed. Albeit this is an important value to know, it does not provide any insight on the ability of a corporation or government to repay that debt. Gross debt, like net debt, is the result of foreign and or domestic borrowings. Economists don’t generally like to use gross debt as it provides no insights on the overall financial health of corporations, governments or countries. For example, if a government has a gross debt that is 50 per cent of gross domestic product (GDP) but has very little cash and or assets (high net debt) it may struggle with this level of debt. However, if a government has a gross debt of 50 per cent of GDP but has large amounts of cash and or assets (low net debt) then it is in a much better position to handle this level of debt.
Chart 1 below shows Australia’s current foreign debt position both in net and gross terms for the public and private sectors. From Chart 1 it is clear that the private sector is a much larger contributor to Australia’s foreign debt than the public sector. The private sector is responsible for approximately 80 per cent of Australia’s net and gross foreign debt.
Chart 1. Foreign debt, December 2010.Australia has a total gross foreign debt of almost the size of its GDP. However, its net foreign debt position is less than 50 per cent of its GDP.
General government (an aggregate of all levels of government: local, state and national) net and gross foreign debt currently stand at 7.7 and 10.1 per cent of GDP respectively. The total Australian public sector (including general government, and financial and non-financial corporation’s controlled by governments) net and gross debt stand at 9.8 and 16.1 per cent of GDP respectively.
Concentrating on the topical issue of the national government net and gross debt, we can see from Chart 2 that they currently (2009–10 financial year) stand at 3.3 and 11.4 per cent of GDP respectively. These debt figures are comprised of all (including financial and non- financial corporation’s) foreign and domestic liabilities for the national government. However, to gain an insight into what this actually means for the national government’s overall financial health, and hence current debt position, it is helpful to compare the current values with previous and that of other countries. Chart 2 shows the national government net and gross debt spanning 1970–71 to 2013–14 with the years 2010–11 to 2013–14 being government Treasury forecasts, while Chart 3 gives net debt and gross debt for successive national governments spanning Whitlam to the current Rudd/Gillard government.
Chart 2. Government debt from 1971 onwards.
Source: 1901 to 1982, Wray Vamplew: Australians, Historical Statistics, Tables ANA 119-129, GF 8-14, GF 25-23, Fairfax, Syme and Weldon, Sydney 1987, ABS, National Accounts, National Income, Expenditure and Product, December 2010, Cat. No. 5206.0, RBA, online statistics database, E10, MYEFO 2010-11, and Parliamentary Library.Chart 3. Government debt between successive governments.
Source: 1901 to 1982, Wray Vamplew: Australians, Historical Statistics, Tables ANA 119-129, GF 8-14, GF 25-23, Fairfax, Syme and Weldon, Sydney 1987, ABS, National Accounts, National Income, Expenditure and Product, December 2010, Cat. No. 5206.0, RBA, online statistics database, E10, MYEFO 2010-11, and Parliamentary Library.Chart 4 presents general government debt in 2010 compared to other countries. It is clearly seen in Chart 4 that the general government net and gross debts, which currently stand at 5.4 and 21.9 per cent respectively, are much lower than those of other countries. Combining this with historical data, it becomes clear that the Australia's current debt position, in both net and gross terms, is very low.
Chart 4. Government debt: An international comparison.
Source: International Monetary Fund, World Economic Outlook Database, October 2010.