A Short History of Government Debt in Australia

 

For anyone interested in government debt in Australia, I recommend spending some time looking at Table 3 in Budget Statement 10.  Here is the link: http://www.budget.gov.au/2012-13/content/bp1/html/bp1_bst10.htm

The numbers are the only guide on government debt trends in Australia and cover 46 years from 1970-71 through to the last of the forward estimates out to 2015-16.

Let’s start where the history starts.

In the early 1970s, governments had net financial assets – that is, net debt was negative.  The McMahon Liberal Government lost in December 1972 and handed over to the Whitlam Labor Government negative net debt of 1.6% of GDP.

Despite the massive growth in real government spending during the Whitlam years, the level of negative net debt was little changed when Whitlam was sacked in November 1975.  I am not sure whether to use the 1974-75 data which shows negative net debt at 2.7% of GDP or the 1975-76 data which shows negative net debt at 0.4% of GDP due to the timing of the change of government at that time, but either way, it doesn’t really matter other than to show that when the Fraser Government took control of the Treasury benches, net government debt was negative.

The Fraser Government was in power for 7 years.  By 1983-84, the level of net government debt had risen to 7.5% of GDP and would reach 9.3% of GDP in 1984-85 as Treasurer Howard covered up the Budget problems during the 1983 election campaign.  Such were the dynamics of the early 1980s domestic and global recession, that net debt rose a bit more over the next year and it peaked at 10.3% of GDP in 1985-86.

After that, the Hawke / Keating Government slashed government spending in the latter part of the 1980s and in 1989-90, the government spending to GDP ratio fell to 22.9% – a level that has never been matched since.  As a result of the fiscal prudence, net government debt fell to a trivial 4.0% of GDP in 1989-90.

Like the Fraser Government before it, the Hawke / Keating Government was hit with a nasty domestic and global recession in the early 1990s and as a result, net debt rose.  With global GDP recording the weakest three-year performance since the early 1980s, net debt peaked at 18.1% of GDP in 1995-96.

The Howard Government won the March 1996 election with the Budget in repair and with the global economy about to embark on a strong expansion.  By the end of the Howard Government in November 2007, net debt was again negative at minus 3.8% of GDP.  Aided by some of the strongest years for world GDP growth ever recorded and no global recession during its tenure, the Howard Government moved to negative net debt via a run of solid Budget surpluses.

In the period of the Rudd and Gillard Governments, net debt has risen and will peak at 9.6% of GDP in 2011-12.  The fiscal stimulus measures that were delivered as the world crumbled to its deepest recession since the 1930s plus a loss of revenue on the back of more subdued rates of economic growth were key in the rise in government debt.  This rise in net debt was similar (as a percentage of GDP) to that experienced by the Fraser government during its term as it dealt with an inflation problem, rising unemployment and near the end of his term, a global recession.

Last week’s Budget confirmed the move to surplus from 2012-13, and with it, a decline in net government debt.  By the end of the forward estimates, net government debt is projected to be 7.3% of GDP.