Snatched from jaws of debt

De­spite the doom­say­ers, the na­tional econ­omy is a global pow­er­house

The Western Star - - MONEY SAVER -

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.

A BIG NUM­BER

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).

BOR­ROW TO GROW

“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.

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