Snatched from jaws of debt

Despite the doomsayers, the national economy is a global powerhouse

WE HAVE this good friend who regularly tells us how much government debt has risen, the interest bill the country is paying and that the economy is therefore a disaster waiting to happen.

We explain patiently that it isn’t as bad as he’s describing and he always replies with a glib one- line response he has picked up from some right- wing commentator on television.

But of late the “government debt crisis leading to our ruin” myth seems to be spreading, as conservative politicians and commentators preach doom and gloom.

So let’s explain the facts about Australia’s government debt and put it in perspective. First up … yes, Australia is in debt. Our mate says national debt stands at $ 536 billion. It’s a big number, isn’t it?

But the size of our economy is big as well. The value of Australia’s gross domestic product ( products and services we produce each year) is valued at $ 1.42 trillion.

Think of GDP as the income the country earns a year … 1420 thousand million dollars.

You see it’s pretty naive to quote government debt levels without comparing them with the earning ability and growth of the economy. While debt has grown, so has the size of the Australian economy, and at a world- class rate.

From the last economic recession in 1991- 92 until last financial year, the Australian economy has grown on average 3.2 per cent a year – well ahead of the US ( 2.5 per cent), Britain ( 2.1 per cent), France ( 1.6 per cent), Germany ( 1.4 per cent) and Japan ( 0.9 per cent)

Despite all the doomsayers, Australia’s economy has been outperforming most of the world’s industrial powerhouses.

Australia’s government debt as a percentage of GDP is currently about 41 per cent but has risen 25 per cent since the Global Financial Crisis in 2009.

Yes, that increase has to be addressed because only Spain and Japan have had a bigger debt increase in the period, as other countries have tried to slow or reduce debt. Hopefully the latest figures showing an early return to Budget surplus will slow our debt increase. The International Monetary Fund is forecasting it will drop in the next five years.

Even so, our government debt as a proportion of GDP is less than half the level of most major industrialised economies, such as Japan ( 236 per cent), Britain ( 86 per cent), Germany ( 60 per cent), US ( 108 per cent), Canada ( 86 per cent) and France ( 96 per cent). “All that means is that we’re the best of a bad lot, shouldn’t we have no debt?” we hear you say.

And you make a good point. Debt has to be at manageable levels but given the size of our economy, our relatively small population and our big infrastructure projects, we’ve always had to borrow to grow. The key is making sure it’s good debt, invested in projects that add value to the economy. A better and more realistic indicator of how manageable our debt levels are is to use the “net debt” measure. For example, when you or the bank measure your personal net debt position, they’ll start with your loans and then offset that amount with savings, investments and money owed to you. If you have $ 100 of debt but $ 30 in savings, $ 20 in investments and $ 10 owed to you, the net debt position is $ 40. It’s the same with a government. The Future Fund, for example, has $ 146 billion invested and the Reserve Bank is a government investment that pays a dividend each year and holds about $ 2 billion on government bonds. When all this is taken into account, Australia’s net debt position is just 19 per cent of GDP. Against the rest of the world we are, again, in pretty good shape. As a single number that $ 536 billion in debt, is big. But so is the size of the Australian economy and the value of government investments. Government debt is always an issue – but it’s nothing to panic about at these levels.