Budget 2020: Debt of $1 trillion is merely the start

Australia’s debt burden will push beyond the $1.1 trillion debt ceiling expected in Tuesday’s COVID-19 budget.

Josh Frydenberg will reveal a budget full of red ink. Picture: Getty Images

Australia’s debt burden will push beyond the $1.1 trillion debt ceiling expected in Tuesday’s COVID-19 budget, with one of the nation’s leading economic analysts saying it will continue to rise to 70 per cent of GDP — or $1.4 trillion — by the middle of the decade.

As revealed by The Australian, Tuesday’s budget will confirm that the federal deficit will peak at just over $210bn in this financial year, accompanied by a lift in the debt ceiling to beyond $1.1 trillion, or 55 per cent of GDP – the highest level since 1958, according to IMF data.

But UTS professor Warren Hogan said the Morrison government would be forced to spend and borrow more over the coming five years to prop up the economy through the aftermath of the COVID-19 recession, predicting the debt to GDP ratio will grow to 70 per cent of national output by the middle of the decade.

This suggests a gross debt burden of $1.4 trillion.

“Unless we have a miracle recovery, history tells us it (the debt level) will be more,” Professor Hogan said.

Treasury’s assumption that a COVID-19 vaccine would be produced next year — a highly uncertain prediction — also heightened the risk that the economic and fiscal forecasts in the budget paper may prove too optimistic, he said.

While debt levels are set to soar, the collapse in bond rates over the past six months means borrowing costs will barely budge. According to Deloitte Access Economics, the budget will reveal the annual national interest bill will reach in the order of $16bn by 2022-23 — below the $18.5bn paid in 2018-19 when borrowing was well below current projections.

Melbourne University tax professor Miranda Stewart said the interest expense was the “real cost” of higher debt. At under 1 per cent of GDP, “the ­reality is the interest cost is really very low”.

In 1986, high interest rates meant the annual cost of public debt hit a peak of 5.3 per cent of GDP, despite debt equivalent to only 25 per cent of national output. “As long as interest costs stay low, the debt is manageable,” Professor Stewart said.

Even at 70 per cent of national output, the predicted debt ­levels would be dwarfed by Australia’s post-WWII experience, when borrowing peaked well above 100 per cent of GDP.

According to research by Ernst & Young economist Jo Masters, our debt to GDP ratio went from 40 per cent in 1939 to 120 per cent in 1945. It then took 15 years to reduce that back down to 40 per cent.

However, the capacity for the country to grow its way out of debt looks significantly reduced in the 2020s versus 70 years before, when Robert Menzies presided over an economy and populations expanding at a rapid pace, suggesting Australians may need to grow accustomed to a higher national debt for longer.

“The big difference between the 50s and 60s and now is we had a substantial growing population and substantial economic growth,” Professor Stewart said.

As a result of border closures, Treasury has already revealed it expects negative net migration in the immediate future.

Set against comparable economies, even borrowing equivalent to 70 per cent of national output would leave Australia’s burden relatively light in a global context.

Australia has been a rare example of a country with stable and even falling debt levels in recent decades. Ahead of the crisis, Japan’s public debt was 200 per cent of GDP, according to IMF figures. Before the pandemic, Italy’s 130 per cent ratio stood out, especially against Germany’s 40 per cent.

The US debt to GDP ratio was already high at 90 per cent, as was the UK’s at 85 per cent.