Omari Gates
Australia's government debt has been a cause for concern, especially in the wake of the COVID-19 pandemic, which resulted in a deficit of almost $300 billion. The country's debt is owed to investors who buy treasuries, which are issued by the government. While the majority of debt is held by non-resident investors, China is the ninth-largest foreign investor in Australia, with 2% of the total $3.8 trillion that was invested in the country at the end of 2019. Australia's debt has also been impacted by its loans to neighbouring Papua New Guinea (PNG), which is heavily indebted to China and may struggle to repay its loans.
| Characteristics | Values |
|---|---|
| Australia's net international investment liability position (government debt and private debt) at 31 December 2016 | $1,028.5 billion |
| Australia's bond credit rating as of May 2017 | AAA |
| Share of Australian government debt held by non-resident investors | Two-thirds |
| Largest international investors in Australia | US and UK |
| China's rank among foreign investors in Australia | Ninth |
| Amount of money owed by Australia to China | 2% of the total $3.8 trillion that was invested in Australia at the end of 2019 by foreign entities |
| Australia's COVID-19 deficit | $300 billion |
| Australia's budget surplus in 2020 | $5 billion |
| Australia's budget deficit in 2021 | $86 billion |
| Amount loaned by Australia to PNG | K1 billion (A$388 million) |
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What You'll Learn
Australia's COVID-19 deficit
The Albanese government is hopeful that voters will look past the budget deficit for the next 10 years, focusing instead on the nation's improved financial situation since the end of the pandemic. Treasurer Jim Chalmers will emphasise that debt and deficit are lower now than Treasury forecasts from the 2022 election campaign. However, they are higher than this time last year.
The COVID-19 deficit has been exacerbated by a productivity slump, with levels returning to the stagnant 2015-2019 period. This has significant implications for the economy, wages, and living standards. To address the deficit, Australia needs to boost productivity growth and make structural changes. Without these interventions, increased spending will lead to larger deficits and higher personal income taxes, disproportionately affecting younger generations.
While China has become a significant global lender, it is not among Australia's top international investors. In 2019, China was the ninth-largest foreign investor in Australia, with 2% of the total $3.8 trillion in foreign investment. The US and the UK are the leading international investors, and Japan is the single largest investor country due to its higher returns and diversity.
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Australia's foreign investors
Australia's foreign debt is owed to a variety of investors, with the US and the UK being the biggest international investors. Other significant investors include Belgium, Japan, Hong Kong, and China, which is the ninth-largest foreign investor. Two-thirds of Australian government debt is held by non-resident investors, and the country's net international investment liability position was over $1 trillion as of December 31, 2016.
The Australian government borrows money by issuing treasuries, which are bought by investors, who then receive interest and the principal amount back. These treasuries can be traded in the 'secondary' market, where investors buy and sell them after they are issued. The government debt fluctuates weekly, depending on receipts, outlays, and large-sum outlays. It is managed by the Australian Office of Financial Management, which is part of the Treasury Portfolio.
Australia's coronavirus deficit has been significant, with the country going from a $5 billion surplus to an $86 billion deficit. The pandemic knocked $33 billion off budget revenues in the 2020 financial year, and the cost of emergency measures was $58 billion that year, rising to $118 billion in 2021. However, some economists, including Nobel Prize winner Paul Krugman, argue that fear around national debt is unnecessary. Krugman asserts that the Australian government can always pay off its debt without suffering hyperinflation, as it issues its own currency.
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Treasuries and the secondary market
The Australian government borrows money by issuing treasuries, which can be short- or long-term. Investors buy these treasuries, lending the government money in return for receiving the principal and interest. These treasury securities trade in the "secondary market", where investors buy and sell them after they are issued.
The secondary market is the largest security market globally, with very narrow bid-ask spreads. It is one of the world's most actively traded markets, where investors can find treasury bills, notes, and bonds posted with active bids and offers. The primary dealers act as market makers in the secondary market, with standing bid/offer quotes in the over-the-counter (OTC) market.
Treasuries can be bought and sold in the secondary market at prevailing market prices after the original issue. These marketable securities are available on TreasuryDirect, where purchases are allowed on a non-competitive basis in increments of $100. TreasuryDirect is the best way for individuals to buy and hold marketable treasury securities.
The secondary market is also useful when investors miss the scheduled sale of a particular treasury bill or note and do not want to wait for the next one. For example, if an investor wants a 1-year Treasury issued three months ago, they can buy it on the secondary market, where it will have nine months left to maturity.
It is important to note that buying on the secondary market is not necessarily more advantageous than buying new issues. The US government guarantees full payments of both principal and interest, so there is no bargain in buying pre-owned treasuries. The yield on new issues is often better than on the secondary market, and the price of new issues is determined by an auction.
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Australia's net government debt
Australia's government debt is held by non-resident investors, with two-thirds of the debt held by investors outside the country. The largest bondholders are often central banks and commercial banks. In April of one year, the Australian government issued a record $13 billion in new bonds in a single day, with more than two-thirds of the interest in the government bond deal coming from domestic banks.
The government borrows money by issuing treasuries, which can be short- or long-term. Investors buy these treasuries, lending the government money in return for receiving the principal and interest back. The Reserve Bank of Australia (RBA) can also hold government bonds, typically buying them in the secondary market. The RBA owns about 7% of the Australian government bond market.
The US and the UK are the biggest international investors in Australia, followed by Belgium, Japan, and Hong Kong. China is the ninth-largest foreign investor, with 2% of the total $3.8 trillion that was invested in Australia at the end of 2019 by foreign entities. Japan has been the single largest investor by country, due to persistent low yields in Japanese government bonds, leading investors to seek higher returns and diversity in countries like Australia.
Australia's near $300 billion coronavirus deficit could take decades to pay back. The coronavirus pandemic knocked $33 billion off budget revenues in one financial year, with another $56 billion projected for the following year. The cost of emergency measures was even higher: $58 billion for the first year and $118 billion for the second. This resulted in a $90 billion budget deterioration in 2019-20, followed by a $190 billion decline in 2020-21, totalling almost $300 billion in debt.
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Australia's budget surpluses
Australia's budget deficit has been a cause for concern, with the country facing a near $300 billion coronavirus deficit. The pandemic knocked $33 billion off budget revenues in the last financial year, with a further $56 billion projected for the current fiscal year. The cost of emergency measures has been high, with a $90 billion budget deterioration in 2019-2020, followed by a $190 billion decline in 2020-2021.
However, the Final Budget Outcome for 2022-23 shows a surplus of $22.1 billion (0.9% of GDP), the first budget surplus in 15 years. This is a significant improvement from the forecast $77.9 billion deficit expected from the previous government. The Albanese Government has attributed this surplus to responsible economic management, spending restraint, and banking revenue upgrades.
The Australian government has provided billions of dollars in cost-of-living relief to its citizens, including energy bill rebates, cheaper medicines, and childcare. Despite the surplus, the nation's finances face growing structural spending pressures in areas such as health, aged care, defence, and interest payments on the debt accumulated by the previous Liberal government.
While China is a significant global lender, with outstanding claims exceeding 5% of global GDP, it is only the ninth-largest foreign investor in Australia, with 2% of the total $3.8 trillion invested in the country by foreign entities as of 2019. The US, UK, Belgium, Japan, and Hong Kong are the biggest international investors in Australia.
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Frequently asked questions
China is Australia's ninth-largest foreign investor, with 2% of the total $3.8 trillion that was invested in Australia at the end of 2019 by foreign entities. Two-thirds of Australian government debt is held by non-resident investors, with the largest bondholders often including central banks and commercial banks.
The Australian government borrows money by issuing treasuries, which can be short- and long-term. Investors buy these treasuries and the government pays them interest over a set period, along with the original loan amount.
Australia's net international investment liability position (government debt and private debt) was $1,028.5 billion at 31 December 2016, an increase of $5.4 billion (0.5%) on the liability position at 31 December 2016. Australia's COVID-19 deficit has also contributed significantly to its debt, with the country going from a $5 billion surplus to $86 billion in deficit.
