How did we get here? The 20-year journey to $1 trillion in debt

When John Howard lost the 2007 election, he could proudly and correctly claim the nation’s finances had never been in better condition.

Budget surpluses and government policy such as the sale of Telstra had dramatically improved the nation’s books. Gross government debt was $55 billion or just 0.3 per cent of GDP.

You would have to go back to the 1910s to find debt at such a low level, when the then-Fisher government started borrowing to pay for Australia’s involvement in World War I.

But in the intervening years, gross debt has climbed and climbed and climbed – to stand at $1 trillion on Thursday, August 20.

It prompts the question first posed by those fiscal hawks, the Talking Heads: how did we get here?

Three large factors – two crises, the third a long-term trend – account for the bulk of that $1 trillion debt.

Howard and Peter Costello lost power in November 2007. By March 2008, American investment bank Bear Stearns had collapsed.

The global financial crisis was just getting started. Tax collections under the Rudd government fell for two consecutive years – the first time that had occurred since the 1940s.

Falling revenue plus stimulus measures to keep the economy afloat meant a sharp lift in debt. By the time the Rudd government was kicked out of power in 2013, gross debt had climbed beyond $260 billion.

The second crisis was COVID. Then treasurer Josh Frydenberg had almost delivered a budget surplus in 2019. By the following year, he was rolling out the largest stimulus measures in Australian fiscal history to deal with a one-in-a-century pandemic.

He oversaw the nation’s largest deficit, a shortfall of $134.2 billion (after the second-largest deficit, of $81 billion, in 2019-20).

Gross debt had already climbed to $542 billion before the pandemic. By the time Anthony Albanese and Jim Chalmers took office, it had reached $895 billion.

In between these crises, a third, slow-burning issue started to hit the budget. From 2010, mass retirement of the nation’s Baby Boomers started to put pressure on important services, led by health and aged care.

The Morrison-era royal commission into aged care revealed deep problems in the sector and the care of hundreds of thousands of people that could be solved only with more spending.

Peter Costello’s 2007 intergenerational report, which mapped out long-term budget trends, noted that budget deficits would be the norm from the 2020s onwards in large part because of the need to increase spending on aged care, health and the age pension.

It was a recognition of the demographic debt destiny of the budget.

Outside of those three key areas, increased spending in new areas, such as the National Disability Insurance Scheme and fresh priorities such as the rise in expenditure on defence, has also contributed to the $1 trillion debt.

The end of low-interest rates is now playing an even larger role.

Between 2013 and 2021, the interest rates on government debt fell by more than half, from 3.9 per cent to 1.6 per cent, as part of a long-term global downward trend. Without that decline, the interest bill on debt would have been higher and government debt would have surpassed $1 trillion around 2022.

But that advantage has turned around. This year, the interest rate on Australian government debt is expected to reach 4.8 per cent.

Interest on debt is now the budget’s fastest-growing cost. This year, $29.6 billion will go on interest, or about 1 per cent of GDP, making it the seventth largest budget expense.

The United States, where government debt surpassed $US40 trillion ($56 trillion) on Thursday, illustrates the dangers of debt and growing interest. Donald Trump’s interest bill so far this financial year is more than $US930 billion ($1.3 trillion) and is the US government’s third-largest expense.

That interest bill, as well as the debt, is growing at a frightening rate. It’s one reason that global interest rates are climbing as the US has to offer better terms to entice investors to buy its debt.

Australia is in a much different position.

Combined with the states and territories, which are carrying $649 billion in debt, Australian public debt is just under half of the nation’s GDP. It’s nowhere near the 120 per cent it reached during World War II and well short of comparable nations such as the US (121 per cent), Japan (237 per cent), Britain (101 per cent) and Canada (111 per cent).

By almost every measure, Australia carries a small amount of debt. That has been confirmed by two of the world’s largest ratings agencies, S&P Global and Moody’s, which in the past fortnight have reaffirmed their triple-A ratings for Australia. Treasurer Jim Chalmers was only too happy to spruik that in question time.

But that could easily change. A collapse in iron ore prices, a surge in unemployment or a widening of the war in the Middle East could drive up debt – just as it did in 2008 and 2020.

Such a situation would leave Australia – and Chalmers – facing extremely difficult questions, the types of which the US and other nations are already confronting.

So that’s how we got here.

But as economists Carmen Reinhart and Kenneth Rogoff documented in their seminal book, This Time is Different, questions over public debt can deliver unimaginable answers.

Newfoundland and Labrador became a dominion nation, just like Australia, in 1907, standing apart from the rest of Canada as a self-governing entity. Their troops fought alongside the Anzacs at Gallipoli.

The nation’s economy was heavily dependent on fish and newsprint. Already carrying a substantial amount of debt by 1928, the prices of their key exports fell by 48 per cent and 33 per cent respectively through the Great Depression.

By 1931, Newfoundland was in deep financial strife. In 1933, when it owed $12.60 in debt for every Newfoundland dollar of revenue, the small nation signed away its sovereignty back to Britain to avoid default. It would join Canada in 1949.

The inability to repay its debt led the small nation down a road to nowhere. Australia doesn’t want to take that ride.

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