US Debt Levels Getting Critical but Australia Can’t Afford to Gloat

Australians might have felt a little superior when the US government was found to have run up a staggering government debt of US$40 trillion (A$55.8 trillion).

That’s a monster sized headwind for a country with extra military spending due to the Iran War, rising interest rates, a massive Budget deficit of around US$2 trillion a year, a tax system that is incredibly lenient towards billionaires and a president who first promised tough action to get rid of the then US$19 trillion debt in 2016 in just eight years.

That certainly won't be happening!

Most worrying of all is that the US government debt-to-annual-income ratio now stands at 125.8% according to the International Monetary Fund.

The US is not on their own.

The Institute of International Finance (IIF) this year estimated that global debt levels had climbed above $US350 trillion ($488 trillion), or 305% of global GDP, with public sector debt of about $US111 trillion.

Australia Good; Trend Bad

Australia, by comparison, looks OK with a debt to annual income ratio running at 50.8%—a much more manageable figure that stands a little under the “average” of other countries.

However, it isn’t a good idea to get too smug though because Australia’s debt picture – while not of the same magnitude – is also fairly worrying.

The culprit here is not so much the federal government but what is also happening among the state governments.

It is a bit like having a parent who is being reasonably responsible with the finances while a group of teenagers are running wild with their credit cards.

The Parliamentary Budget Office’s National Fiscal Outlook released recently shows the scale of budget repair required as public debt leaps well above its pandemic-era peak.

Trillion-Dollar Debt Just the Beginning

While the Federal Government’s net $1 trillion debt is a problem, the state’s share of national debt is now forecast to almost double in a decade, from 20% before the pandemic to around 38% by 2029-30.

The cost of debt servicing varies by state but the NSW Audit Office’s finding that in 2024-25, interest on debt cost the state budget $19.6 million a day is an indicator of the scale of the problem.

Higher state debts are felt much more immediately by people because states have to divert revenue away from delivering essential services to pay interest bills.

And there is no guarantee that those debts will start to wane anytime soon.

State surpluses are rarer than hens’ teeth and, with the war in the Middle East helping to boost already solid domestic inflation pressures, a housing downturn that will crimp stamp duty and an ageing population that is putting more pressure on health and disability care all mean the glide path back to a balanced budget is sitting on a knife edge.

Stubborn domestic inflation, revenue volatility, and ever-growing service demand pressures—particularly for healthcare and disability care—are also contributing factors.

State governments might predict they are on a path to surpluses but – like irresponsible teenagers – they still struggle to actually rein in their spending.

GST Carve-Up Not Helping

States also have far fewer levers to pull to increase revenue and are quite reliant on Federal funds through the GST distribution, which is also skewed slightly in their favour due to the dodgy Scott Morrison deal that continues to enrich Western Australia and, to a lesser extent, some of the other states as well.

The current Prime Minister Anthony Albanese has also backed the current WA GST carve-up even in the face of some excellent research by the Productivity Commission, which gave the deal a resounding thumbs down.

The States only raise about 51% of their own revenue and effectively rely on the Federal government to supply the rest through the GST sharing deal.

Supercharged State Health Costs

The latest Federal Treasury Intergenerational Report shows that, by 2062-63, 23.4% of the Australian population will be 65 or older.

That compares to one in ten back in the early 1980s.

Analysis by the independent Parliamentary Budget Office also paints a worrying picture of state debts.

Even once well-run states like Tasmania are already seeing interest repayments tracking to soar by more than 6,000% because of a blowout in debt levels, with NSW and Victorian taxpayers facing an increase of more than 400% in interest repayments on their much larger debts.

According to the budget office, the states and territories had a combined $158.3 billion in gross debt in 2018-19, while Federal gross debt was then almost $650 billion.

By the end of this decade, state and territory gross debt is forecast to reach a combined $770.9 billion—a 387% increase.

Federal government debt is expected to reach $1.2 trillion, a 92% lift.

Victorian Debt the Largest

Victoria faces the biggest debt load, forecast to reach $244.9 billion, an increase of 635% while NSW’s debt is expected to climb by 440% to $219.4 billion.

The largest increase is in Tasmania, where debt is on track to soar by 1850%, from $600 million to $11.7 billion with the island state’s interest bill forecast to explode by 6280% from $10 million in 2018-19 to $638 million in 2029-30.

It seems botched planning for new ferries and building a new AFL stadium doesn’t come cheap.

Only the federal government and the over-compensated WA are expected to keep their increase in gross debt to double percentage figures over that period but all parts of the country are facing a lift in the share of their revenue that goes to paying their interest bill.

Debt Takes Away Flexibility

While not all debt is bad – especially if it is spent on highly productive infrastructure – high debt levels greatly reduce the ability of all governments to respond to changing circumstances.

They also pass on an unpleasant and enduring legacy for the next generation to pay.

Nobody knows when the next global financial crisis or pandemic will arrive but when and if these external shocks come, it will be the states and countries with the lowest debt that will have the greatest flexibility in responding quickly to a genuine crisis.

Until then, countries and states are producing home grown crises made out of excess spending and ballooning debt.

Bizarrely, their actions are leading to even higher interest rates through a worried bond market.