Research Note 4 1998-99

Domestic Debt

Tony Kryger
Statistics Group
10 November 1998

Introduction

Domestic debt data for Australia are interesting for a number of reasons. First, domestic debt levels contribute to the level of demand and therefore add to inflationary pressures. Furthermore, they measure the level of exposure by financial institutions and give an indication of the susceptibility of the general population to shocks such as interest rate rises or increases in unemployment.

Despite these uses, there is no overall measure of domestic debt for Australia. Data, however, do exist at the subsector level, but such data are often hard to find in official publications.

The purpose of this Research Note is to explain the concept of domestic debt and to provide a series for those subsectors for which domestic debt data are available.

Concepts

Domestic debt can be expressed either in gross or net terms.

Gross domestic debt refers to the total amount of borrowing from residents by other residents of Australia. The concept of gross domestic debt for all Australia exists only in theory as it is not possible to measure the debt liability of every entity in the country. Measures of gross domestic debt, however, do exist at the subsector level (see below).

Net domestic debt is gross domestic debt minus lending by residents to other residents of Australia. Australia's net domestic debt is easily measured as it must equal zero-since borrowing to and from foreigners is excluded. That is, one person's debt asset is another person's debt liability and when summed together the result has to equal zero.

The concepts of gross and net domestic debt can easily be illustrated with the analogy of a family. Assume that Australia is comprised of just one family (family A) and the husband owes the wife $80 and the wife owes the husband $100 and nothing is owed to or by any other family member. The gross domestic debt of family A in this situation is $180. The net domestic debt, or total borrowing less total lending within the family, is $0.

Sectoral Debt

The gross domestic debt of a particular subsector is defined as the total amount borrowed outside the subsector but excluding all amounts borrowed within the subsector. Net domestic debt for a particular subsector is simply the total amount borrowed less total lending outside the subsector.

The concepts of gross and net domestic debt for subsectors of society can again be illustrated with the analogy of a family. Assume that family A in the above example is just one sub-sector of Australian society. Assume that in addition to the amounts owed by the husband and wife to each other, family A has also borrowed $120 from family B and has lent $20 to family C. The gross domestic debt of the subsector called family A is $120, representing all amounts borrowed outside the family but excluding all amounts borrowed within the family. The net domestic debt of family A is $120 less $20 or $100.

It is obvious from the above example that if the gross domestic debts of all subsectors are summed together, the result will not equal the gross domestic debt for all Australia since any borrowing within subsectors has been excluded. On the other hand, the net domestic debts of all subsectors taken together will still sum to zero.

These concepts are important in understanding the measures of public and private domestic debt discussed below.

Public Domestic Debt

Net public domestic debt figures are shown in Table 1. They measure the amount borrowed by the public sector from the private sector and exclude all borrowing from overseas as well as from within the public sector. The figures show that there was some growth in public domestic debt in the early 1990s in response to the recession at this time, but as a percentage of gross domestic product (GDP) the level is about the same now as it was in the late 1980s.

Public domestic debt figures are not published anywhere and must be derived from data published by the Australian Bureau of Statistics (ABS). Specifically, public domestic debt is derived by subtracting from total public sector debt the amount of public sector borrowing from overseas. Total public sector debt is published in ABS, Public Sector Financial Assets and Liabilities (Cat. No. 5513.0) while public sector borrowing from overseas is published in ABS, Financial Accounts (5232.0).

Private Domestic Debt

Private domestic debt figures are available only on a gross basis. They are published by the Reserve Bank of Australia in its monthly Reserve Bank of Australia Bulletin and measure the amount of credit extended to the private sector by domestic financial intermediaries. Expressed another way, these figures show the total liabilities of the private non-financial sector, excluding inter-sector liabilities and liabilities to the rest of the world.

Private domestic debt is subdivided into housing, other personal and business debt. While business debt is by far the largest component of private debt, the fastest growing sector is housing. As shown in Table 2, total private domestic debt has doubled in size from 47 to 94 per cent of GDP during the past 20 years.

This doubling of debt reflects both a cultural shift in attitude to debt and the increased availability of credit instruments. It has consequences for the level of hardship that might be created in the community if interest rates or unemployment were to rise sharply.

(1) Public sector borrowing from overseas is derived from Table 13 of ABS, Financial Accounts by summing together the non-equity claims which the rest of the world have on the Australian public non-financial sector.

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