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The truth behind our ‘dangerous’ public debt levels

By Philip Soos - posted Friday, 12 April 2013


An even better indicator of the government's debt position is its ability to service the debt – the net interest repayment burden – again expressed as a percentage of GDP. The gross or net debt to GDP ratio is not a perfect reflection of the government's ability to finance its debt due to changes in interest rates at different times.

The following figure shows the net interest repayment burden peaked at 1.7% of GDP in 1987 and 1996, even though the gross and net debt to GDP ratios were higher in 1996 than 1987. The difference is due to higher interest rates during the 1980s.

 

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What matters for countries with high levels of government debt is how high the net interest repayment burden is. This separates the US and Japan – countries with a relatively high level of government debt – from the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain).

The federal government is currently in an excellent financial position. Even if the gross and net debt to GDP ratios were to rise, this does not necessarily translate into higher net interest repayments if the RBA further cuts interest rates from already historical lows and purchases government bonds. The federal government has one of the lowest debt burdens in the world.

 

Similar trends to the federal government public debt to GDP ratio is found in aggregate state and local government debt. From the 1850s through to 1890, colonial governments used debt to finance the construction of infrastructure. Tax revenue comprised a paltry amount of public finance (from 2% to 5% of GDP).

 

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The surge in the ratio from 1890 onwards was not so much due to state and local government spending to offset the effects of the depression, but rather due to falling GDP. For Australia, this depression was economically worse than that of the Great Depression of the 1930s. A similar spike occurred during the 1930s.

Unfortunately, data on aggregate state and local governments were not continued after 1982 in the sources used to compose the figures. Parliamentary Library analysis provides some data on current state and territory net debt, again showing the debt burden is certainly not onerous. Gross foreign public debt sits comfortably at 20.7% of GDP.

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This article was first published on The Conversation.



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About the Author

Philip Soos is co-founder of LF Economics, co-author of Bubble Economics and a PhD candidate.

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