Posted 17/04/2015 by Alicia Hall
This Flagpost article presents a snapshot of the Australian Government’s current debt position.
Gross debt: The International Monetary Fund’s Government Finance Statistics Manual (2014) defines gross debt as ‘all liabilities that are debt instruments’ with a debt instrument defined as ‘a financial claim that requires payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates, in the future.’
Gross debt is not a concept used in the context of the Australian Government Budget Papers. However, it can be calculated using certain balance sheet liabilities. The major component of gross debt on the Australian Government’s balance sheet is Commonwealth Government Securities.[1] This has been used as a proxy for gross debt in this paper, due to the availability of time series data on this item.
Gross debt looks at what is owed by the Australian Government to other parties. However, it doesn’t take into account financial assets held by the government (such as cash and debt securities owned by the Commonwealth Government), which would be available to meet its liabilities. This is where the concept of net debt is useful.
Net debt: This is defined in the International Monetary Fund’s Manual as ‘gross debt minus financial assets corresponding to debt instruments.’ Financial assets corresponding to debt instruments include currency and deposits; debt securities and loans.
Net debt is a concept used within the Budget Papers, with details of net debt figures calculated back to the early 1970s. According to the 2014–15 Mid-Year Economic and Fiscal Outlook (p. 94), Australian Government general government sector net debt is equal to the sum of deposits held, government securities (at market value), loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements.[2]
Chart 1 presents the Commonwealth’s gross debt position for the years spanning June 1971 to June 2014. However, it is important to note these include borrowings made by the Commonwealth on behalf of the State/Territory governments (although they remained a liability of the Commonwealth). As such, Commonwealth gross debt is higher than it would have been if it only reflected the Australian Governments underlying funding requirements. Total Securities issued on behalf of State governments made up nearly 78 per cent of all Commonwealth Government Securities in 1971, falling to 7.7 per cent in 1995.[3] The State/Territory governments now undertake their own borrowing, so the amount of State/Territory debt to be repaid as of June 2014 is relatively small ($8 million).[4] The historical time series contained in the Budget Papers does not provide a breakdown of the amount of Commonwealth debt made on behalf of States and Territories (although it is available from 1983 from the AOFM).
Chart 2 presents the net debt position for 1970-71 to 2017-18, with 2014–15 onwards being estimates or projections, based on expected GDP and debt growth. As for gross debt, net debt would be lower if Commonwealth borrowing on behalf of the State/Territory governments was not included. The Australian Government’s net debt currently (2013–14) stands at 12.8 per cent of GDP.
To gain an insight into what this actually means for the national government’s overall financial health, it is helpful to compare this data with previous governments and that of other countries.
Chart 3 reflects the level of net debt at the end of the financial year directly prior to that particular government losing office. In net terms, the largest debt position over the reporting period was recorded during the mid-1990s. However, the most recent Mid–Year Economic and Fiscal Outlook (2014–15) indicates net debt is projected to increase to similar levels by 2016-17.
Charts 4 and 5 present Australia’s general government gross and net debt as a per cent of GDP, compared with other countries. The data is from 2013, the most recent available. The term general government used here is from the International Monetary Fund and is defined as all entities that fulfil the function of the government as their primary activity. In Australia this includes National, State/Territory and Local Governments. Charts 4 and 5 clearly show Australia’s general government gross and net debts are much lower than those of a range of other advanced economies.
Chart 1
Source: Mid-Year Economic and Fiscal Outlook 2014-15, p. 274.
These figures include CGS held on behalf of the States and Territories (a practice that ceased in July 1990). These figures exclude Commonwealth holdings of CGS.
Please note that these figures differ from those contained on the RBA website, Statistics, Releases, Australian Economic Statistics 1949-50 to 1996-97, Occasional Paper No. 8, Table 2.19, Commonwealth Government Securities on Issue, http://www.rba.gov.au/statistics/frequency/occ-paper-8.html. The difference largely relates to the GDP figures used by the RBA in their calculations.
Chart 2
Source: Mid-Year Economic and Fiscal Outlook 2014-15, Table D6, p. 273.
Chart 3
Sources: Mid-Year Economic and Fiscal Outlook 2014-15, Table D6, p. 273.
Chart 4
Source: International Monetary Fund, World Economic Outlook Database October 2014, accessed April 2015. The IMF advises that gross and net levels are not always comparable across countries. See the IMF’s World Economic Outlook explanatory material on General Government Net and Gross Debt (National currency) for a full description of calculations and assumptions by country. Note that IMF staff estimates were used for Japan.
Chart 5
Source: International Monetary Fund, World Economic Outlook Database October 2014, accessed April 2015. The IMF advises that gross and net levels are not always comparable across countries. See the IMF’s World Economic Outlook explanatory material on General Government Net and Gross Debt (National currency) for a full description of calculations and assumptions by country. Note that IMF staff estimates were used for Japan.
[1] K. Di Marco, M. Pirie and W. Au-Yeung, ‘A History of Public Debt in Australia,’ in Economic Round-up, No. 1, 2009, pp. 1-15.
[2] Net debt is valued at ‘market value’ in the Budget Papers (in line with the offsetting assets). However, gross debt (or CGS on issue in this context) is valued at both ‘market value’ and ‘face value.’ When calculating gross debt as a proportion of GDP, ‘face value’ is a better measure as it better reflects a Government’s fiscal sustainability over time.
[3] Reserve Bank of Australia website, Statistics, Releases, Australian Economic Statistics 1949-50 to 1996-97, Occasional Paper No. 9, Table 2.19, Commonwealth Government Securities on Issue, http://www.rba.gov.au/statistics/frequency/occ-paper-8.html, accessed 10 April 2015.
[4] Australian Office of Financial Management website, Statistics, Historical Data, Australian Government Securities on Issue, 2013-14, Table H13. http://aofm.gov.au/statistics/historical-data/commonwealth-government-securities-on-issue/, accessed 10 April 2015.
For further information contact Sue Johnston.