The truth behind our ‘dangerous’ public debt levels

Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent ABC radio interview. During the interview, Robb claimed growth in public debt was excessive and unsustainable, and accused Treasurer Wayne Swan of improperly representing the government's current position on the public debt.

That public debt may constitute a problem is a familiar refrain from the conservative side of politics and economics. Many no doubt remember Howard and Costello's incessant criticisms of the Keating government's management of public finances when they took power in 1996, blaming them for being bad economic managers. The Coalition government certainly hasn't let Labor forget this.

When discussing public debt, it makes sense to compare it to the size of the economy, or GDP (Gross Domestic Product). Quoting absolute figures is not sufficient to understanding the scale of any debt (see here for a bad example). GDP represents the size of a country's income, though, of course, governments can only commandeer a portion of that income through taxation. The following figure displays the commonwealth government's debt since Federation.

In its first decade, the government had no debt before piling it on to finance Australia's involvement in World War I. The period 1914 to 1918 represented the largest growth period by far in federal government debt (the second largest occurred in 2009 to combat the effects of the Global Financial Crisis). Interestingly, debt decreased between 1931 and 1937 in absolute terms, certainly the incorrect policy response to an economic depression.

The ratio jumped once more due to World War II, to a record peak of 104% in 1946. A combination of solid repayment and strong GDP growth resulted in the rapid fall of the ratio to a low of 7% in 1974. The ratio would've likely fallen even further if not for the mid-1970s recession, requiring the government to debt-spend. The same again occurred during the early 1980s recession.

During the late 1980s, a massive commercial property (land) bubble formed, primarily in Melbourne and Sydney. It burst in 1989 due to the rapid escalation of interest rates to a nominal 18%. The resulting recession forced the Keating government to engage in a spending spree in an attempt to reduce the high unemployment during the early 1990s. Commonwealth debt peaked at 21% in 1996.

Once the Coalition gained power, again a combination of debt repayment and strong GDP growth saw the ratio fall to the lowest point on record, to 5% in 2007 (the Rudd government managed to lower it by a tiny fraction in 2008). Since the onset of the GFC, however, public debt expanded again under the Rudd and Gillard governments, to 16% in 2012.

A better measure of public debt is net rather than gross debt. The federal government doesn't have liabilities alone; it also owns the debts of others. Subtracting this debt from the government's shows net debt, which is always smaller than gross debt.