Australia’s debt blowout worst in developed world: OECD data

The size of Australia’s federal and state government debt compared to its economy has risen 3.8 times in the last two decades, according to analysis of OECD data by The Australian.

Jim Chalmers during his pre-budget address in Brisbane. Picture: Tertius Pickard/NewsWire

Australia has recorded the ­sharpest increase in public debt in the developed world, with ­government liabilities as a proportion of national output growing almost fourfold over the past two decades.

An analysis of OECD data by The Australian shows that gross public debt as a proportion of GDP has increased from 15.2 per cent in 2004 to 57.9 per cent last year, due to two global economic crises, the escalating cost of big-build public-works projects and an explosion in social services spending.

While other nations have much higher public debt to GDP levels, including Japan (238 per cent), the US (122 per cent) and Canada (105 per cent), no other major economy has experienced a blowout on that scale.

As the Albanese government puts the finishing touches to next week’s federal budget, Jim Chalmers on Tuesday defended Labor’s economic credentials, ­arguing that his fiscal efforts had stopped a further deterioration of the country’s finances.

“Because of our efforts, debt is down by more than $170bn this year which means billions of dollars of savings in interest costs, one of the six biggest spending pressures in the budget,” the Treasurer told the Queensland Media Club.

But with Dr Chalmers revealing there would be “fewer surprises” in next week’s federal budget, economists expect the update to project Australia’s debt burden to push higher still as mounting spending pressures place further strain on the nation’s finances.

In its latest economic outlook, released on Monday, the Paris-based OECD called on member countries to bolster their fiscal discipline to ensure debt levels ­remained sustainable. “Decisive fiscal actions are needed to ensure debt sustainability, preserve room for governments to react to future shocks, and generate resources to help meet large current and impending spending pressures from ageing populations, climate change mitigation and adaptation measures, and plans to significantly enhance defence spending,” the OECD said.

The size of gross government debt relative to Australia’s economy is projected to continue climbing, according to OECD forecasts, and will reach 60.6 per cent of GDP by the end of 2025, before subsequently totalling 62.8 per cent in 2026.

Former federal Treasury official Robert Carling – now a senior fellow at the Centre for Independent Studies, a centre-right think tank – said that a further rise in government debt risked “squeezing out” other areas of public spending.

“Australia’s debt interest burden will just keep going up and up, and (paying) debt interest will take an increasing percentage of the government’s revenue,” he said, imploring the Albanese government to reduce growing debt levels in the March 25 budget.

“The budget should be cutting expenditure, or at least curbing the growth of expenditure,” Mr Carling added, saying curtailing the ballooning growth in government spending would need to be confronted by whoever won the impending election.

That view was shared by veteran budget watcher Chris Richardson, who said the rise in public debt and the higher interest repayments meant Australia was “losing options” if it had to respond to international upheaval.

“Because we had such little debt, Australia had manoeuvrability,” Mr Richardson said, pointing to the Covid-19 pandemic and the global financial crisis.

“You want to have that flexibility … (but) we’ve started to lose our wriggle room.”

Even with healthy increases in tax revenue, next week’s federal budget is expected to project a hefty deficit, with Dr Chalmers on Tuesday foreshadowing the bottom line would not differ “very substantially” from previous ­projections.

Released in December, the Mid-Year Economic and Fiscal Outlook forecast the budget to record a $26.9bn deficit in the current financial year, with cumulative deficits over the four-year forward estimates period expected to total $144bn.

Dr Chalmers on Tuesday defended increased government spend­ing, while failing to commit to deeper structural saving drives outside banking revenue upgrades. After ramping-up government spending and expanding the public service, he claimed the private sector was now “making a more substantial, more promising contribution to GDP growth”.

“Growth has rebounded solidly in the economy; the private sector has started to take its rightful place as the key driver of growth in our economy,” he said.

An anti-coal protester on stage during Treasurer Jim Chalmers’s pre-budget address. Picture: Tertius Pickard/NewsWire

The Coalition has similarly shown little appetite to reduce government spending beyond its declaration it will trim the size of public service. But it has provided few details on which bureaucrats would be in the firing line.

Martin Foo, a lead analyst at credit rating agency S&P Global, warned growing spending demands in defence and the energy transition, alongside social services programs such as the National Disability Insurance Scheme, risked placing further pressure on government debt levels.

“A lot of these spending pressures had been papered over by Australia’s rather remarkable luck when it came to commodity windfalls and a pretty strong labour market,” Mr Foo said. “But if and when those commodity prices normalise, then you’re still going to be stuck with these spending pressures.”

Warning the fiscal discipline of state and territory governments appeared to be “slipping”, he said a failure to curb spending growth risked another round of credit rating downgrades.

“State credit ratings are going to continue to drop,” he said. “They’ve already dropped by one notch on average since the pandemic and we could see another round of downgrades in the next two years if the trend continues.”