Australian Government debt

Budget Review October 2022–23 Index 

Gregory O’Brien

In Australia, and in countries around the world, government economic support packages in response to the COVID-19 pandemic have led to large increases in government debt. This continues the trend of increasing debt since the Global Financial Crisis (GFC). Since the beginning of the pandemic, Australian Government gross debt has increased from $534.4 billion in March 2019 to $894.9 billion as of 28 October 2022. The October 2022–23 Budget forecasts further increases in gross debt to $1.159 trillion (43.1% of GDP) by the end of the 2025–26 financial year (Budget strategy and outlook: budget paper no. 1: 2022–23, p. 218). While these are the highest levels of debt on issue by the Australian Government since the 1950s, they remain well below both Australian historical peaks reached following the Second World War (p. 8) and current government debt levels held by governments in other developed countries.

Key terms are outlined below, followed by an overview of Australian Government debt figures in the Budget based around 3 frequently asked questions: how do current levels of Australian Government debt compare to the past; how they compare internationally; and who owns Australian Government debt. A final section highlights where to find more detailed discussions of debt in the Budget.

Australian Government debt issuance and key terms

Australian Government debt is a key component of the Australian Government Budget. Government spending is funded either through receipts—primarily taxes—or through borrowing. In the Budget, the difference between receipts and payments is referred to as the cash balance, which has been in deficit (payments have exceeded receipts) since 2007–08. The Budget estimates that the underlying cash balance will be $36.9 billion (1.5% of GDP) in deficit in 2022–23 and will remain in deficit throughout the next decade through to 2032–33 (Budget paper no. 1, pp. 74; 81). These deficits have led to a steady increase in the level of Australian Government debt, which is forecast to continue rising over the next decade.

The Australian Office of Financial Management (AOFM) manages Australian Government debt issuance. The AOFM issues 3 types of debt securities, collectively known as Australian Government Securities (AGS):

Treasury Bonds: medium to long-term debt securities that pay interest at a fixed annual rate every 6 months. These are the largest type of AGS, representing 92.8% of AGS on issue as of 28 October 2022.

Treasury Indexed Bonds: medium to long-term debt securities that include adjustments for inflation. These represented 4.2% of AGS on issue as of 28 October 2022.

Treasury Notes: short-term debt securities with maturations up to one year. These represented 3% of AGS on issue as of 28 October 2022.

The total face value of AGS on issue at a given point in time, which represents the total amount that will need to be repaid when all extant AGS mature, is used as a measure of gross debt in the Budget. The AOFM publishes a weekly figure for total AGS on issue, broken down into the 3 types described above, as well as more detailed information in its data hub.

While gross debt is a good representation of the total magnitude of outstanding debt, it may not be the best measure for analysing debt sustainability depending on the financial assets available to service or pay off this debt. For this reason, the Budget also provides figures for Australian Government net debt, defined as ‘the sum of interest-bearing liabilities less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements)’ (Budget paper no. 1, p. 223). These financial assets are primarily held in government investment funds, such as the Future Fund.

Whether gross debt or net debt is a better measure of government indebtedness will depend on the context of the analysis. The difference between these measures is described in more detail when looking at international comparisons of government debt, below.

Trends in Australian Government Debt

The Budget provides historical data for a range of budget aggregates back to 1970–71 in the Historical Australian Government Data statement of Budget paper no. 1 (Statement 11). When comparing levels of debt across long periods of time, it is useful to convert the dollar values of debt into a relative measure, usually the ratio to GDP, to control for the impacts of price changes across the economy. Figure 1 shows gross debt, represented by the total face-value of AGS outstanding, as a ratio to GDP over the last 50 years and including Budget estimates through to 2025–26. It also shows the interest payments on this debt for the same period, also as a ratio to GDP.

Figure 1        Australian Government total AGS on issue (gross debt) and interest paid

Graph - Figure 1 Australian Government total AGS on issue (gross debt) and interest paid

Source: Budget paper no. 1, p. 382.

Figure 1 shows that Australian Government debt fluctuated around 20% of GDP from the early 1970s to the mid-1990s with one period of sustained decreases in the late 1980s. Government debt then trended down between the mid-1990s until the GFC in 2007–08, as the Howard Government prioritised debt repayment and budget surpluses. From 2008–09 in the wake of the GFC and associated government economic support packages, government debt has steadily increased as a ratio to GDP. The October 2022–23 Budget forecasts government debt to GDP to fall in 2021–22 and 2022–23 as nominal GDP growth increases at a higher rate than gross debt, but increase again from 2023–24 (Budget paper no. 1, p. 382). In dollar terms, gross debt is forecast to increase to reach a trillion dollars in 2023–24, reaching a peak over the forward estimates of $1.186 trillion in April 2026 (Budget paper no. 1, p. 218). While current and forecast debt to GDP ratios are high relative to recent history, they are still well below the peak reached following the Second World War of over 120% of GDP (p. 8).

The increase in the level of Australian Government debt following the GFC had not seen a commensurate rise in the amount of interest paid because interest rates on Australian Government debt fell over the period, largely offsetting the increase in the level of debt. Interest rates on Australian Government debt have risen steeply throughout 2022, however. This increase has been common to many countries globally in response to inflationary pressures and tightening of monetary policy by central banks. This increase in interest rates has led to an increase in the estimates for Australian Government interest payments as a proportion of GDP, which are estimated to increase from 0.8% of GDP in 2022–23 to 1.2% of GDP in 2025–26. The Budget provides a discussion of the impact of higher interest rates on the budget in Box 3.4 on pages 84–85 of Budget paper no. 1.

International comparison of General Government debt

Despite increases in Australian Government gross and net debt since the GFC, levels of both remain relatively low when compared to other countries. The International Monetary Fund (IMF) publishes data on General Government sector gross and net debt across countries. The IMF approach includes all levels of government (Australia Government, state and local governments), which allows more meaningful comparison across countries with different structures of government. Figure 2 shows IMF estimates of gross debt and net debt for 2022 across several advanced countries from the IMF’s Fiscal Monitor October 2022 publication.

Figure 2        IMF General Government gross and net debt (% of GDP) estimates, 2022

Graph - Figure 2 IMF General Government gross and net debt (% of GDP) estimates, 2022

Source: International Monetary Fund (IMF), Fiscal Monitor: Helping People Bounce Back (Washington, DC: IMF, October 2022), Tables A7 and A8.

Figure 2 shows the important difference between gross debt and net debt when comparing across countries. Countries with significant financial assets, such as Canada (held by public pension plans) and Norway (held in a sovereign wealth fund) have much lower levels of net debt than gross debt once these financial assets are incorporated. This is also relevant to a lesser extent for Australia, where the $242 billion in the Future Fund and other smaller government investment funds have contributed to a widening gap between gross debt and net debt over time (p. 1).

There is variation across countries in the degree to which these financial assets are held to meet future specified expenditure purposes, and some debate as to whether it is appropriate to consider these assets as offsetting government debt. Gross debt is a more consistent measure across countries, as there is less variation due to different social security regimes.

As Figure 2 shows, despite the increase in both Australian Government net debt and gross debt since 2007–08, the level of government debt compared to international peers remains relatively low. The Australian General Government gross debt to GDP ratio is less than half that of the United States, and less than a quarter that of Japan. Both gross debt to GDP and net debt to GDP ratios are lower than any G7 members, and closer to mid-sized economies including Korea and New Zealand.

Holdings of Australian Government Securities

Australian Government debt is owned by a range of Australian and international investors. The AOFM provides information on the share of AGS on issue owned by non-residents on a market-value basis. Under the Guarantee of State and Territory Borrowing Appropriation Act 2009, the AOFM was tasked with establishing a Public Register of Government Borrowings. As the AOFM has no powers to compel financial intermediaries to disclose the beneficial owners of AGS they administer, the register has limited information on the countries of residence of foreign owners of AGS.

The Reserve Bank of Australia (RBA) started purchasing significant amounts of AGS on the secondary market as part of its monetary policy response to the COVID-19 pandemic in order to lower yields on government bonds and maintain liquidity in bond markets. This led to the RBA holding a growing share of the total AGS on issue. The RBA ceased purchasing AGS on 10 February 2022, and in its May 2022 Statement on Monetary Policy decided that:

[…] the Board will not reinvest the proceeds of maturing government bonds and expects the Bank’s balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end. The Board is not currently planning on selling the government bonds that the Bank has purchased during the pandemic. (p. 3)

This decision means that RBA ownership of AGS should slowly recede as the existing AGS owned by the RBA mature. As total outstanding AGS is not forecast to decline, these maturing bonds will need to be absorbed by the resident and non-resident markets for AGS. Given the duration of these bonds, this process is likely to slowly occur over the next decade.

Figure 3 below shows estimates for the ownership of AGS by non-residents, the RBA and other domestic owners. The chart shows resident holdings of AGS have steadily increased over the last decade and non-resident holdings have fallen as a proportion of the total while RBA holdings have increased over the last 2 financial years. The reduction in the proportion of AGS held by non-residents reduces the risk of interest rate volatility associated with capital flight, when non-resident investors sell overseas assets and repatriate the money, often in response to market volatility.

Figure 3        Estimated resident, Reserve Bank Australia and non-resident holdings of AGS

graph - Figure 3 Estimated resident, Reserve Bank Australia and non-resident holdings of AGS

Source: Parliamentary Library calculations based on Australian Office of Financial Management, Non-resident holdings of AGS, and Reserve Bank of Australia, Holdings of Australian Government Securities and Semis.

Where to find additional discussion of debt in the October 2022–23 Budget

While this article provides a broad overview of the debt figures contained in the Budget, more detailed discussion is provided on several debt-related topics in Budget paper no. 1:

  • Budget paper no. 1 – Statement 3: Fiscal Strategy and Outlook provides the medium-term (through to 2032–33) projections for the underlying cash balance (p. 81), gross debt (p. 97) and net debt (p. 100), and how these projections have changed since the Pre-election Economic and Fiscal Outlook 2022 (PEFO).
  • Statement 3 includes a discussion of how changes in productivity growth, government debt yields and NDIS costs since PEFO have impacted medium-term projections for the underlying cash balance and gross debt (Box 3.2, p. 82).
  • Statement 3 also provides a discussion on the impact of higher interest rates on the budget, including their impact on government interest payment projections (Box 3.4, pp. 84–85).
  • Statement 7: Debt Statement provides detailed figures on Australian Government debt parameters over the forward estimates (to 2025–26).
  • a complete breakdown of Treasury Bonds on issue is provided in Table 7.4,  p. 220.
  • yield curve assumptions (interest rate assumptions for Treasury Bonds of different maturities) used in the Budget and how they have changed since the March 2022–23 Budget are provided on page 225.
  • Statement 8: Forecasting Performance and Sensitivity Analysis discusses how changes in underlying assumptions impact key budget forecasts. The sensitivity analysis for movements in yields (pp. 246–248) shows how alternative assumptions of 10-year bond yields would lead to different assumptions for the path of gross debt levels.


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