Probably not – but high and rising debt will boost CPI and interest rates, and stifle GDP growth and investors’ returns.
In America’s real debt crisis (15 May), I wrote: “The choice is stark: Americans must either undertake radical budget reform and (public) debt deleveraging, or accept continued economic stagnation – and if current trends worsen, eventually risk a debt crisis. They categorically refuse the former, so they blithely accept the latter.”
What about Australia? In this article I analyse public (the sum of federal, state and local government) as well as private (corporate and household) debt in Australia, Britain and the U.S. since the 19th century. I uncover commonalities among and differences between these three countries:
- In each, the ratio of total debt to GDP has risen greatly since the 1980s – most rapidly by far in Australia, albeit from a low base, since the GFC. Indeed, this country’s recent plunge from low to high public debt is unprecedented.
- Household debt is the biggest component of total debt here; conversely, public debt is the main contributor to America’s and Britain’s rising total debt.
- American and British households’ ratios of debt to GDP have decreased significantly since the GFC; in Australia, in contrast, this trend is at best embryonic.
- In this country as in the U.S., rising debt is stifling economic growth: each additional $1 of debt is generating ever less than $1 of extra GDP. But unlike the U.S., where it’s growing exponentially, debt here is growing less rapidly (linearly).
My conclusion contains good news: a domestic debt crisis seems less likely to erupt in Australia than in America or Britain (where it’s also improbable). But there’s also bad news. It’s reasonable to expect that this country’s debt-induced stagnation won’t merely persist: it’ll intensify. Here, as in Britain and the U.S., fiscal recklessness is rife and reform is too hard; hence there’s plenty of scope for the situation to worsen.
Australia’s addiction to high and rising government spending, budget deficits and debt will continue to place upward pressure upon consumer price inflation and rates of interest; it’ll also stifle economic growth. That, in turn, augurs poorly for living standards – and most assets’ returns.
Using data from the Global Debt Database compiled by the International Monetary Fund (which is also the source of the data in Figures 2-10), Figure 1 plots Australia’s gross public debt (the sum of the colonies’ debt until 1900, and of state, local council and Commonwealth debt since 1901) as a percentage of Gross Domestic Product (GDP). Broadly speaking, the ratio’s evolution shows three phases.
Figure 1: Gross Public Debt, Percentage of GDP, Australia, 1860-2022
During the first, it rose cumulatively massively – from 9% of GDP in 1860 to 92% in 1946. But it didn’t rise continuously: perhaps as a long-term consequence of the banking crisis and depression of the early 1890s, it sagged from 60% in 1895 to 26% in 1911; as a result of heavy borrowing during the First World War and throughout the 1920s, it zoomed to 98% in 1932; during the Great Depression it waned (to as low as 69% in 1937) and during the Second World War it waxed (to 92% in 1946).
In the second phase, from the end of the Second World War until the outbreak of the GFC, the ratio fell almost without interruption to 10% ‒ which was the lowest percentage since 1863.
During all but a few of these years (1996-2007) neither nominal nor CPI-adjusted public debt decreased; instead, it rose much less rapidly than GDP; as a result, the ratio of public debt to GDP fell cumulatively and massively.
Since the GFC, however (which forms the start of what I’m assuming is the third major phase), public debt has climbed rapidly whereas GDP has increased sluggishly. The ratio has thus rebounded; indeed, it’s increased without interruption to 58% in 2022.
That’s the biggest since 1949. It’s also the ratio’s largest and fastest rise on record: in no other 15-year period, in other words, has it increased by more than the 49 percentage points it did from 2007 to 2022.
Table 1 substantiates this crucial fact. I ranked-ordered the series in Figure 1, divided the sorted series into five equal groups (by number of observations) and computed each group’s average ratio of public debt to GDP. During one-fifth of the years since 1860 (Quintile #1, which I label “low debt”), the ratio of debt to GDP has varied between 8.5% and 20.5%. Conversely, one fifth of the time since 1860 (Quintile #5, “high debt”), the ratio has exceeded 59.7%.
Table 1: Australia’s Ratio of Public Debt to GDP, by Quintile, 1860-2022
Since the eve of the GFC, Australia’s ratio of public debt to GDP has vaulted from among the lowest in its history to the boundary between Quintiles #4 and #5. In other words, it’s skyrocketed from among the lowest 2-3% of observations since 1860 to among the highest 22% ‒ and, it’s reasonable to suppose, during the next few years will climb into the “high debt” Quintile #5.
Does Australia’s presently high and rising public debt imply a crisis at some point? At present, that’s probably drawing a long bow. When adjusted for the consumer price index (using data compiled by the RBA), Australia’s public debt (as opposed to its ratio of public debt to GDP) has usually been far higher in the past than it is now (Figure 2).
Figure 2: Gross Public Debt, Australia, Trillions of CPI-Adjusted $A, 1922-2022
Total Commonwealth, state and local government debt is presently $1.35 trillion. It’s true that it’s risen from just $0.22 billion in 2007, and that CPI-adjusted public debt is now higher than at any time since 1973. Equally, however, it’s been far higher during much of the past century: it averaged $2.38 trillion during the 1960s, $1.88 trillion during the 1950s, $4.87 trillion during the 1940s, $4.49 trillion during the 1930s and $2.78 trillion during the 1920s.
Since 1989, the IMF’s Global Debt Database has disaggregated Australia’s public debt into its two (Commonwealth and state/local government) components. Until the mid-1990s, as a result of rising debt as well as stagnant and falling GDP, both levels’ ratios rose (Figure 3).
Figure 3: Categories of Public Debt as Percentages of GDP, Australia, 1989-2022
During the next dozen years, however, both ratios of debt to GDP fell to levels below those prevailing in the late-1980s. And since 2005, both have risen. Canberra’s has skyrocketed eight-fold from 6% in 2007 to 44% in 2022, whereas state and local governments’ ratio has risen just half as quickly, i.e., four-fold from 3.6% to 14.4%. Of course, states’ finances vary greatly: WA’s are comparatively good, NSW’s mediocre and Victoria’s, relatively speaking, awful.
Nonetheless, state and local governments’ ratio of debt to GDP was little higher in 2022 than in the early-1990s; similarly, the ratio of state/local to total public debt (ca. 30%) has remained remarkably stable. The Commonwealth’s ratio, in contrast, was three times higher last year than it was 30 years ago – and there’s no credible sign that its current rise will soon abate.
Why do Australian governments’ rising debts seem to trouble neither Australians as a whole nor their rulers or foreign creditors? It’s not just that CPI-adjusted debt was far higher in the distant past; perhaps it’s also because other countries’ ratios of public debt to GDP are presently twice as high – or more – than Australia’s; thirdly, in these other countries it’s been far higher in the past than in Australia today.
Figure 4 compares Australia’s public debt as a percentage of GDP since 1860 to Britain’s and the U.S.’s since 1800. Since 1860, Australia’s ratio has averaged 39%; during the same interval, Britain’s and the U.S.’s have averaged 89% and 44% respectively; and since 1800, Britain’s has averaged 112% and the U.S.’s 33%. Over the super-long term, Australia’s average ratio is much lower than Britain’s and little higher than America’s.
Figure 4: Gross Public Debt, Percentages of GDP, Three Countries since 1800
Broadly speaking, Britain’s ratio shows five phases:
- In order to fight the Peninsular and Napoleonic wars from 1800 to 1815, the ratio zoomed from 176% in 1800 (the already very high level incurred to combat Revolutionary France) to as high as 261% in 1821.
- It then commenced a very long and cumulatively drastic decrease – to 27% in 1914. Britain achieved this result by (a) freeing its economy from myriad agricultural and trade restrictions, which over time greatly increased its GDP, and (b) running budget surpluses and using the surpluses to repay debt.
- The First and Second World Wars caused the ratio of debt to GDP to skyrocket. It jumped as high as 219% in 1923, and then halved to 123% in 1940 before doubling (and then some) to its all-time high (270%) in 1946.
- From then until 1991, the ratio gradually collapsed to 28%. This time, however, consumer price inflation did most of the work: in nominal terms, debt rose rather than fell; but thanks to the growth of CPI, GDP rose much faster than debt; as a result, their ratio fell.
- Since the early-1990s and especially since the GFC and the COVID-19 panic, the trend has been sharply upward: to 43% in 2007, 85% in 2019 and 104% today. As a result, Britain’s ratio is higher today than at any time since 1963.
In the U.S., war has usually but not always caused the ratio of public debt to GDP to spiral. Moreover, war’s effect upon debt has been less drastic there than in Britain. During the first quarter of the 19th century, for example, including the War of 1812, the ratio varied from 8% to 18%. It then began to fall, and by 1833 it reached 0% – the first and only time in U.S. history that it has fully repaid its national debt. Until the outbreak of the Civil War in 1861, public debt remained within the range 1%-4% of GDP.
The Civil War caused the ratio to rocket to 30%. It then receded, to 3% in 1893, and generally remained within the range 3%-5% until the country entered the First World War in 1917. The ratio zoomed to 33% in 1919 but plunged to 18% by 1929. During the Great Depression it more than doubled (to 44% in 1939), and then trebled during the Second World War (to 121% in 1946).
As in Britain, so too the U.S.: after the war GDP increased much more quickly than public debt; consequently, the ratio fell cumulatively drastically (to 53% in 2001). Then came the attacks on 9 September 2001 and the “War on Terror” – and the ratio rose to 66% in 2005; then came the GFC, and the ratio rose to 100% in 2011. The torrent of deficit spending continued after the GFC, and the ratio rose to 109% in 2019. Then came the COVID-19 panic and the torrent accelerated (to 135% in 2020) before receding somewhat (to 128% in 2022). As a result, and led by its federal government, America’s ratio of public debt to is now the highest in its history. Financially, it’s as if the U.S. Government is refighting a never-ending conflict even bigger than the Second World War.
An apologist of Australia’s ratio of public debt to GDP would stress that adjusted for CPI it’s smaller today than it was in the 1920s-1960s. It’s also much lower than current and many past levels in Britain and the U.S.
Levels versus Rates of Change
That defence isn’t false, but it’s incomplete and thus potentially misleading. It’s true that, regardless of the interval of time, the level of Australia’s ratio of public debt to GDP has mostly been significantly lower than in the other three countries (Figure 5).
Figure 5: Mean Levels of Gross Public Debt, Percentages of GDP
Yet the ratio’s rate of increase since 1980, 1990 and 2007 mostly exceeds – and since the GFC greatly exceeds – the other countries’ (Figure 6). Until the GFC, Australia’s public debt was low by its own historical standards and by prevailing American and British standards; today, however, thanks to its rapid rate of increase, that’s no longer so.
Figure 6: Increases (Percentage Changes) over Three Intervals of the Ratio of Gross Public Debt to GDP
Figure 7 plots non-financial corporate debt as percentages of GDP in these three countries (the IMF’s GDD data for the U.S. have been available since 1950, for Britain since 1966 and for Australia since 1977). The trend of each series is upwards (but weakly so since the GFC): Australia’s ratio has averaged 64%; since 1977, Britain’s has averaged 63% and the U.S.’s 61%. Today, Australia’s ratio is 65%, Britain’s is 72% and the U.S.’s is 81%. Australia’s ratio is now somewhat lower than the others’, but historically there’s been little difference.
Figure 7: Non-Financial Corporate Debt, Percentages of GDP, Three Countries
Since the turn of the century, however, Australia’s ratio of household debt (which overwhelmingly comprises residential mortgage debt) to GDP has significantly and increasingly exceeded the American and British ratios (Figure 8). Today’s ratio is 119%, whereas Britain’s is 86% and America’s is 78%.
Figure 8: Household Debt, Percentages of GDP, Three Countries