Spiralling national debts may well result in many years of high inflation

It is widely known that many leading Western nations are becoming caught up in a debt spiral, which is now the most serious since the aftermath of World War Two. In descending order, the worst affected of prominent countries in terms of high debt to GPD (2024 figures) include Japan 237%, Greece 154%, Italy 135%, USA 124%, France 113%, Canada 111%, UK 94%, and Australia (currently well down the list at) 44%.

Australia had started with very low national debt but is rapidly catching up, with big deficits now predicted as far as the forward estimates can see. Australia's gross debt is on track to crack the $1 trillion mark in a matter of weeks according to the Treasury. This is despite taxes and royalties from mining (especially iron-ore) booming, and rising personal income taxation.

Worse still, our national debt is being used to fund a big rise in social spending, instead of economic investment, that could have enhanced future incomes and our ability to repay. Also, a lot of supposed economic investments (e.g. Snowy 2, Inland rail, Suburban Rail Loop, most "renewable" projects) are also uneconomic and won't contribute to Australia's ability to repay.

High debts and continuing deficits have been explained away by arguments such as "debt does not matter" and that governments can rack up as much national debt as they like (without ever worrying about paying it off) because "we owe it to ourselves".

All this is simply misleading.

In terms of national debt, borrowers and lenders are different types of entities, and growing debts create big imbalances within and between economies. They also place a rising interest burden on national budgets. High debt countries and provinces also eventually risk a loss of confidence in their governments as debtors. This can eventually put entire financial systems at risk.

The Northern Territory and Victoria are both rapidly losing fiscal credibility and may well require support from the Commonwealth.

The NT's net debt (much of it built up by the outgoing Labor government) is approaching $14 billion, the highest per capita in Australia. It leaves the NT with by far the highest net debt per capita in the nation, coming in at almost $48,000 per person for 2025-26. This is equivalent to a net debt to revenue ratio of 121 per cent. Despite plans to achieve an operational surplus, infrastructure spending is projected to cause the Territory's net debt to continue rising. Interest paid on NT debt is expected to reach $911 million annually by 2029.

Victoria's state debts are also amongst the worst of provincial governments in the world, with much of the problem due to irresponsible government spending on infrastructure projects. The state's total government sector net debt was almost $151 billion last financial year, with the amount Victorians paid in interest amounting to more than $6.7 billion. Victoria now has the highest taxes, highest net debt, and least competitive business and investment conditions of any state in the nation.

When governments squander money, this seriously impacts investment and future productivity. In the end, rising taxes or other measures to control debt become inevitable. Governments still wanting to spend more, have been known to activate the printing press (i.e. inflate the money supply) if central bankers won't or can't prevent them.

Historically two contrasting approaches have been used to reduce national debts. Governments can either repay debt or inflate it away.

In Australia we have the precedent of the Howard government, which paid off $96 billion of debt inherited from earlier eras. The Howard government achieved this through running a series of Budget surpluses, helped by a substantial contribution from the sale/privatisation of public assets and by a strong economy.