Low debt is so yesterday!

Government borrowings are skyrocketing as you read this. Unfashionable though it is to worry about this, there are still some of us who do.

Among the propositions made to dismiss these concerns is that Australia’s government debt is much lower than that of other advanced countries… so why worry?

It is undoubtedly true that Australia has a much smaller public debt burden than the average of advanced countries, but as a justification or excuse for running up more debt, it is wearing thin.

The chart below, based on IMF compilations of general government gross and net debt of its member countries, shows what has been happening and what is projected to happen in Australia and advanced countries on average.

Our public debt has expanded rapidly since the halcyon days of 2007-08, when it was even negative in net terms. Now that measure heading for more than 50% of GDP. We cannot explain away the increased fiscal vulnerability this presents by pointing to the greater vulnerability of others. There are several reasons why Australia’s relative position does not provide the reassurance often claimed:

• Our margin of advantage over the advanced country average is shrinking.
• That shrinking advantage is measured against a level of debt in other countries that is itself rising dramatically.
• Australia will soon have levels of gross and net debt equivalent to the averages of advanced countries about 12 years ago.
• The advanced country average conceals huge variation among its constituent members. The average is skewed by very high debt levels in Japan, the US, the UK and a handful of EU countries. Compared with other countries Australia’s debt is similar or higher.
• It is a mistake to think that economic growth has not been slowed down by in countries with high debt burdens.
• It should not be assumed that Australia, as a capital importing country that needs to remain attractive as a destination for investment, has the same ability to carry public debt as other countries.
• It is not only public debt that matters to assessments of financial vulnerability. We have extremely high household debt and substantial corporate debt.

International comparisons are just one aspect of a much wider debate on public debt. There are many reasons to be concerned about the permissive attitude to debt now apparent in economic policy circles.