Public debt risk

It has been clear since early in the pandemic that Australia was set for a huge blow-out in deficits and debt. The tabling of 2020/21 budgets by the Commonwealth and all states and territories (except the ACT) in the final quarter of 2020 now enables the blow-out to be quantified to 2023/24 — subject to the uncertainties being even greater than usual at this time.

The results are outlined in the new CIS report, The Looming Iceberg: Australia’s post-pandemic debt risk .

While Commonwealth gross debt alone is set to double from $626 billion before the pandemic to $1,240 billion in 2023/24, total debt will be much larger when the states and territories are included in the picture.

For the non-financial public sector as a whole (which includes both general government and government businesses such as water utilities), the increase is from about $900 billion pre-pandemic to $1.9 trillion ($1,900 billion) in 2023/24. As a percentage of GDP, this is a near doubling from 46 per cent to 86 per cent.

The Commonwealth is set for the biggest deficits and increase in debt, but most states and territories will also see very large increases relative to their revenue bases. The largest will be in Victoria.

Several states were ramping up infrastructure spending and borrowings even before the pandemic, but its effects on all budgets — and the fiscal stimulus and support measures adopted by the federal and state governments — account for much of the increase projected since 2019.

It can — and no doubt will — be debated how much of this was unavoidable and how much excessive.

But the debt risk it will leave as a post-pandemic legacy will stand as a priority issue for policy in the post-pandemic economy. It poses a risk to growth in the longer term, reduces the choices governments will have in taxation and spending, and limits their capacity to respond to future crises.

There is a complacent view that the debt burden will effortlessly dissipate with low interest rates, economic growth and inflation, but such an outcome is not assured.

The debt will not be paid off. But there is a best case scenario in which the burden becomes manageable — provided governments are pro-active in strengthening the foundations for vigorous and sustainable economic growth, exercising fiscal discipline and keeping inflation and interest rates at moderate levels.