Lexi Webster
Australia's national debt, or government debt, is the amount owed by the Australian federal government. The Australian Office of Financial Management manages the government debt and does all the borrowing on behalf of the government. The debt is influenced by factors such as government surplus/deficit, GDP growth, inflation, and interest rates. Australia's net government debt as a percentage of GDP has fluctuated over the years, with forecasts predicting a continuous increase between 2024 and 2029. The debt is also impacted by the government's macroeconomic policies and tools, such as the use of treasury bonds to manage the bond market.
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What You'll Learn
Management of Australian government debt
The AOFM has a framework for managing funding risk and interest rate risk relating to its borrowing activities. It met the Australian Government’s borrowing requirements between 1 January 2020 and 30 June 2023. The AOFM did not define any targets, limits or benchmarks for the cost of the debt portfolio. It has policies and processes in place to support cost-effective borrowing, but it does not assess whether the debt portfolio was managed at a minimum cost subject to acceptable risk.
The AOFM and Treasury have largely effective governance arrangements to support operational activities to fund the Australian Government, including establishing, approving and executing a strategy for debt management. However, the roles, responsibilities and accountabilities amongst key stakeholders in relation to debt management oversight and decision-making under the legislative framework are not transparent. There is a lack of clear documentation of debt management policy and operational decisions and the rationale behind these decisions.
The value of AGS outstanding has risen from $561.8 billion as of 1 January 2020 to $889.8 billion as of 30 June 2023, primarily due to increased Australian Government borrowing during the COVID-19 pandemic. The amount of interest required to be paid increases with the amount of AGS on issue. The amount and trajectory of AGS on issue is related to the fiscal sustainability of the Australian Government. Increased debt on issue incurs higher debt servicing costs in the long term.
Australian government borrowings are subject to limits and regulation by the Loan Council, unless the borrowing is for defence purposes or is a 'temporary' borrowing. Government debt and borrowings (and repayments) have national macroeconomic implications and are used as a tool to manage the national economy, enabling the government to create or dampen liquidity in financial markets, with flow-on effects on the wider economy.
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National macroeconomic implications
The Australian government debt is the total amount owed by the federal government and is managed by the Australian Office of Financial Management, which operates under the Treasury Portfolio. The debt is subject to limits and regulations by the Loan Council, except when borrowing for defence purposes or temporary borrowing.
The Australian government debt has several national macroeconomic implications. Firstly, it serves as a tool for the government to manage the national economy. By borrowing or repaying debt, the government can influence liquidity in financial markets, which has a subsequent effect on the wider economy. For instance, the government can create or dampen liquidity by buying or selling government bonds, respectively. This action can impact interest rates and the availability of credit in the economy, affecting businesses' and consumers' ability to invest and spend.
Secondly, the government debt influences the country's overall financial position and creditworthiness. As of June 2023, the Australian government debt accounted for 38.0% of the country's Nominal GDP, a slight decrease from 41.9% in the previous year. A higher debt-to-GDP ratio can indicate a more significant portion of government revenue being directed towards debt servicing, potentially limiting the government's ability to invest in other areas, such as infrastructure, education, or social services. However, it is worth noting that Australia's debt-to-GDP ratio is relatively low compared to most developed countries, and the country has maintained a strong bond credit rating of AAA.
Thirdly, the composition of government debt holders can have implications for the economy. As of 2017, around two-thirds of Australian government debt was held by non-resident investors, a share that has been rising since 2009. A high proportion of foreign ownership of government debt can impact the country's balance of payments and the value of the Australian dollar. Additionally, changes in foreign investors' confidence or risk appetite may lead to sudden capital outflows, potentially affecting financial market stability.
Lastly, the management of government debt can impact the availability of credit for the private sector. When the government borrows large amounts, it may compete with private borrowers for available funds in the market, potentially driving up interest rates for businesses and households. On the other hand, during economic downturns, the government may deliberately increase its borrowing to stimulate the economy, providing liquidity to financial markets and potentially lowering borrowing costs for private borrowers.
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International investment liability position
Australia's net international investment liability position (government debt and private debt) was $1,028.5 billion at 31 December 2016, according to the Australian Bureau of Statistics. This represented an increase of $5.4 billion (0.5%) on the previous year's liability position.
The net international investment liability position is influenced by various factors, including government surplus or deficit, economic growth, inflation, and movements in the market value of government securities and interest rates. Australia's net government debt as a percentage of GDP in the 2016-17 budget was estimated at 18.9% ($326 billion), which was significantly lower than most developed countries.
The Australian government's debt is managed by the Australian Office of Financial Management, which is part of the Treasury Portfolio. The government's debt and borrowing activities have macroeconomic implications and are used as tools to manage the national economy. The government's ability to finance itself is secure, as it issues its own currency and can always meet financial liabilities denominated in that currency.
Australia's international investment liability position continued to fluctuate in the following years. As of 31 December 2023, Australia's IIP liability was reported at $836.6 billion, a decline of $107.5 billion from the end of 2022. By 31 December 2024, the liability position decreased further to $653.2 billion.
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Historic and current debt-to-GDP ratio
The Australian government debt is the amount owed by the Australian federal government. The Australian Office of Financial Management, which is part of the Treasury Portfolio, is the agency that manages the government debt and does all the borrowing on behalf of the Australian government. The net government debt is gross government debt less its financial assets, which is often expressed as a percentage of Gross Domestic Product (GDP) or debt-to-GDP ratio. The debt-to-GDP ratio is influenced by a government surplus or deficit, the growth of GDP and inflation, and movements in the market value of government securities.
The Australian government debt-to-GDP ratio has fluctuated over the years. In 1995–96, the net government debt was at an original peak of 18.5% of GDP ($96 billion). The net debt then decreased, and in the 2006–07 fiscal year, the Australian government had net positive bond holdings for the first time in three decades. The net government debt as a percentage of GDP in the 2016–17 budget was estimated at 18.9% ($326.0 billion), which was much lower than most developed countries. The budget forecasted that net government debt would increase to $346.8 billion and $356.4 billion in 2017–18 and 2018–19, respectively. Despite this increase in aggregate terms, the Australian government expected the proportion of debt to GDP to peak at 19.2% in 2017–18 before decreasing.
The Australian government debt-to-GDP ratio reached an all-time high of 47.6% in June 2021 and decreased to 38.0% in June 2023. The Australian government debt accounted for 69.91% of the country's nominal GDP in 2021, a 0.69% increase from 2020.
The Australian government debt does not include government funds held in reserve within statutory authorities such as the Australian Government Future Fund and the Reserve Bank of Australia. The government debt also does not take into account the net income of these statutory authorities.
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The Australian government's ability to finance itself
The Australian government's financing capabilities are enhanced by its ability to issue its own currency, ensuring it can always meet financial liabilities denominated in that currency. This inherent advantage provides a level of financial security and stability. Additionally, the government's debt management strategies include utilising tools such as macroeconomic management, influencing liquidity in financial markets, and managing government securities, interest rates, and currency values.
Historically, the Australian government employed different systems for borrowing, including the TAP system, which was retired in 1979. The introduction of a tender system for short-term Treasury Notes and Treasury Bonds followed, with bonds issued through an auction process. During the Howard government, large budget surpluses led to a reduction in treasury bonds, and a review was conducted to assess the impact on bond market participants. Despite the surplus, the government decided to continue issuing debt in the form of treasury bonds to maintain the bond market.
Looking at more recent data, Australia's net international investment liability position (including government and private debt) stood at $1,028.5 billion as of 31 December 2016, according to the Australian Bureau of Statistics. Furthermore, Australia's bond credit rating was rated AAA by all three major credit rating agencies as of May 2017, reflecting a strong ability to finance itself.
In summary, the Australian government's ability to finance itself is robust due to its currency issuance powers, effective debt management strategies, and historical decisions to maintain a functional bond market. The government's debt levels remain manageable relative to GDP, and the country's credit rating underscores its financial stability. However, it is important to monitor the national debt, which is forecasted to increase between 2024 and 2029, reaching a new peak.
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Frequently asked questions
Australian government debt is the amount owed by the Australian federal government.
The Australian Office of Financial Management, which is part of the Treasury Portfolio, manages the government debt and does all the borrowing on behalf of the Australian government.
Government debt and borrowings (and repayments) have national macroeconomic implications. They are used as a tool by the national government in the macroeconomic management of the national economy, enabling the government to create or dampen liquidity in financial markets, with flow-on effects on the wider economy.
The net government debt is gross government debt less its financial assets, which is often expressed as a percentage of Gross Domestic Product (GDP) or debt-to-GDP ratio. In June 2023, the Australian government debt accounted for 38.0% of the country's Nominal GDP.
The government debt fluctuates from week to week depending on government receipts, general outlays, and large-sum outlays.
