Don’t fret over the national debt

The usual suspects are fretting over the Australian Government’s ballooning debt, claiming we will leave a nasty legacy for future generations:

“On very optimistic projections, we don’t think Australia will be debt-free until the early 2080s,” said Cian Hussey, research fellow at conservative think tank the Institute of Public Affairs.

The Federal Government has committed to a record $213.7 billion deficit this year as it attempts to borrow and spend its way out of Australia’s first recession in nearly three decades – brought on by devastating COVID-19 lockdowns.


Asked by Sunrise host David Koch on Wednesday whether it was fair to leave a huge debt for future generations to pay off, Mr Morrison hit back.

“There will be nothing to leave to our children if we didn’t act now, David,” he said.

“This is the worst recession we’ve seen since the Great Depression. This is 45 times worse an impact on the global economy than we saw during the global financial crisis. We’ve targeted (the spending), it’s proportionate, it’s scalable and it’s temporary. And that’s to enable us to get back on our feet and get going again.”

The IPA has modelled two scenarios, one in which gross debt peaks at $1.92 trillion in 2037, the budget returns to surplus the following year, and the debt is paid off by 2063.

The second scenario has debt peaking at $2.05 trillion in 2042, a return to surplus in 2046, and the debt paid off by 2080.

In the first scenario, GDP growth stabilises at 5 per cent, whereas in the second it settles at 3 per cent.

Mr Hussey told budget forecasts “tend to be optimistic” so it was “pretty depressing that the Morrison Government hasn’t even tried to outline when we might see a surplus or pay down the debt”…

Would the IPA seriously prefer that federal government cut spending? This would be a terrible idea as it would send the economy into an austerity-led depression, driving unemployment into the stratosphere, causing widespread business failures, and tanking tax receipts.

The Australia’s government should instead take advantage of record low borrowing rates to ramp-up infrastructure and public housing spending. Not only would this help overcome Australia’s massive infrastructure and public housing deficits (brought about by 15 years of mass immigration), but would also help stimulate the economy during a period of weak private demand and high unemployment.

Indeed, in the absence of public spending, the Australian economy would already be in a much deeper hole:

One only needs to look at the experience of the UK after the GFC to see how ill-advised the IPA’s prescriptions are.

Nor should we worry about the national debt. Although debt is projected to hit nearly $1 trillion next financial year, because of record low interest rates, the cost of servicing it as a percentage of GDP will be almost half of what it was during the last recession of 1992.

The Grattan Institute shows the data clearly:

It has never been cheaper for governments to borrow. As the next chart shows, the interest rate on 10-year Australian Government Bonds is less than 1%. If inflation stays above 1%, as the Reserve Bank and Treasury expect, the “real” interest rate the federal government pays on the bond will be negative. That is, it will effectively be paid to borrow.

These very low interest costs change the dynamics of managing debt we accrue now. Investments that boost future growth – including spending to reduce unemployment and close the output gap – will pay for themselves.

This is the fiscal “free lunch” spoken about by the former chief economist of the International Monetary Fund, Olivier Blanchard, and the deputy governor of the Reserve Bank of Australia, Guy Debelle

The good news is that with interest rates on government borrowing so low, debt as a share of GDP can be reduced without pursuing austerity in the form of deficit reduction…

Even if interest rates were a little higher than now (say, 1.5%), the government can reduce debt relative to GDP even while continuing to run large deficits, provided that nominal GDP growth returns to a moderate level (say, 4.5%, as it was before the pandemic).

The next chart shows that under these circumstances the government can run deficits of up to $50 billion and still reduce debt as a share of GDP.

Different rates of GDP growth would change this story, as the next chart shows. With an even higher nominal growth rate, debt would shrink even faster relative to GDP. In a scenario of prolonged low growth, debt would increase relative to GDP a little, but remain very modest.

The government can do things to boost nominal growth in areas such as tax reform, education and skills, workforce participation, energy and climate policy, and land-use planning. The Reserve Bank should also do more by boosting inflation, which would support nominal growth.

The bottom line is that now is not the time for budget austerity. The federal government should instead borrow and spend to smooth the economic shock.

The alternative is much slower growth, rising unemployment, rising business failures, and thousands of Aussie being needlessly thrown into poverty.

Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. RobotSenseiMEMBER

    But for years and years and years this has been politicised by one particular party as “debt = bad”.
    I wouldn’t expect reasonable discourse on the issue to resume in any great hurry.

  2. He said: “Debt free by 2080”. Lol

    Shows how clueless the commentariat are. The debt will accumulate indefinitely until such time as the currency is destroyed – and then there will be no debt. The very idea that even a dollar of the current debt will ever be repaid is nonsense.

    • +1

      When US has enough inflation to threaten the US$(Earth’s Reserve Currency), the Fed will do everything it can to save it.
      As Paul Volcker did in 1980/81.
      5% cash rate?
      Australia’s rate will be higher than the US.

      This could happen within 12 months.
      God bless the Dreamers.

    • my view is the govt will destroy the debt via inflation (an old trick that goes back centuries) given it is only paper backed by no collateral, or perhaps????? land tax but that seems to difficult a problem to impose a tax that everyone can see. that is why i agree inflation will be the way given it is not understood by the population. ask any average person what inflation is or what the notes / coins in your wallet represent and they dont underatnd except that it buys things LOL. they have no idea of monopoly of currency via fiat, or even that coins and notes are a liability of the govt. i recently saw we just paid back our debt from WW1. perhaps govt will swipe money from our bank acs. i genuinelt think we are rooted as there is no way out….except perhaps war…seems to always happen when there is financial catastrophe

      • All unbacked currencies fail eventually — and the current system will too. There is no point the RBA trying to save the AUD as it is only the US Dollar that matters — if they trash their currency we may as well follow suit (or, have to follow suit).

    • The90kwbeastMEMBER

      But if every country follows this lead and racks up massive debts, will the currency be destroyed? People are saying the USA should have had hyperinflation for a decade and it hasn’t happened despite the massive increase in money supply. Not deficit spending as such I know but still. Surely this is only an issue if you’re the only player in the game with this strategy, which Australia at least certainly isn’t?

      • Sure, and that logic is precisely what a lot of economic commentators are using to justify big printing and spending programs i.e. if all countries print at the same rate then relatively speaking, FX rates should stay roughly the same. But the ultimate bell-whether is gold and you can’t print that. When gold starts rallying hard it tells you that there is something amiss in fiat-land.

        To further probe the above point — if all major countries printing at the same rate was a genuine ‘solution’ then we’d all just print trillions and send every household a cheque for a $1,000,000 and live happily ever after.

      • Pretty easy to grasp
        Create a huge amount of money, diluting the currency.
        Then huge loss in purchasing power.
        The people catch on…they spend all their spare cash on anything real before it becomes unaffordable…. good whisky is handy to barter with.
        Everybody is devastated… and that’s why they will increase interest rates substantially to save the system.

        • Ailart SuaMEMBER

          What’s your solution, Dominic?

          The only issue with Kelton’s MMT model: or any other financial/economic model for that matter, is the inability of governments to manage supply and demand efficiently – and of course govern for the majority. Apart from that, she is spot-on.

          And to rectify rubbish-government, we need to take Constitutions and voting institutions to a much higher level. What they’ve been producing for the past 40 plus years are ‘dumb’, non-accountable, donor-manipulated ‘puppets’.

          • The problem is the debt-based money system, which has led to substantial and ever-growing debts. As debt grows, relative to the assets that can feasibly service it, so the economy starts to suffocate. Something economists have blamed on ‘secular stagnation’, which is BS – no such thing exists.

            Secular stagnation stands for: we can’t explain it but it’s happening so let’s give it a name.

            MMT has been tried many times over the past 1,000 years — it just wasn’t called such a grandiose name. Kelton is selling MMT as ‘new best diet ever’. Just a re-hash of old hat. But this time it’ll work!

            The solution is to abandon the debt-based money system but there are too many vested interests who gain advantage from it. Powerful people — both wealthy and politically. It will never be abandoned voluntarily but it will die (and probably sooner than many think).

    • Christine Lagarde announced the EU pushing ahead with their Crypto last week and the US reserve announced it was looking into transferring this week along with the RBA.

      If anyone is in any doubt as to where this is all going perhaps take a left turn onto this lovely bridge I have for sale – its a road to nowhere – come on along.

      Democrats have already announced a $2.6 Trillion bailout plan for their blue states. That is it – that is the inflection point.

      Reality is though that the transition to a digital currency will be the single most disruptive event in post modernity – weeds growing through cracks in main street type event.


      • This crypto thing is a red herring and designed specifically to paper over the fact that fiat currencies are failing. The monetary authorities realise the jig is truly up now and this shift to crypto is an attempt to almost ‘refresh’ the existing currencies in the minds of jaded and sceptical market participants. If they don’t do something soon they could face a catastrophic loss of faith in the existing monetary system. No one should be fooled though and everyone who has the means should take preventive action by acquiring real assets — anything that will continue to have real value into the future. These digital currency will be created in endless quantities – inflation will be high and they will do all they can to hide it.

      • That statement doesn’t make any sense. One mans debt is another man’s asset. That’s why it needs to be paid back. It’s not about replacing dollars.

        • Ailart SuaMEMBER

          “One mans debt is another man’s asset. That’s why it needs to be paid back”

          So, where did this AU$ ‘asset’ originate? And we are talking about an asset and a debt within a sovereign currency issuing country (Australia). If the ‘two men’ you’re referring to are are simply ordinary citizens, then yes, the debt should be repaid. But, if the debt is interest on federal government treasury bonds, it’s a completely different story. The ‘man’ with the debt doesn’t have access to an unlimited supply of AU$, but the Australian federal government does. At the end of the day, AU$’s can be issued without even the need to auction T Bonds, but T Bonds are popular for a number of reasons.

          Federal government ‘debt’ shouldn’t be referred to as debt or deficit. It’s simply new AU$’s being ‘issued’ into the economy. Federal government surpluses are the reverse; AU$’s being ‘sucked’ out of the economy (tax and budget cuts) – good for government’s ego’s, but bad for the citizens. Were you aware that every US federal budget surplus preceded a recession or a depression?

          • There are several questions in there, so bear with me:
            – Governments issue debt when they live beyond their means (that’s the key takeaway there). Look at the accumulated debt, look at the annual deficits and you can measure how well they’re managing things. They are the Admin function for the economy.
            – Cash and coins in circulation are a liability of the central bank — the gubmint has nothing to do with the money creation process. In the old days, the asset backing the cash and coins was gold but these days the ‘asset’ backing cash and coins is debt. Thus, we have a ‘debt-based money system’.
            – The primary source of ‘new money’ in such a system is commercial banks: when they make new loans, they simultaneously create deposit money. When loans get repaid, that deposit money disappears, so providing more loans are made than are being paid back the overall money supply increases.
            – When credit creation slows, the central bank lowers rates to encourage more people to borrow, because if loan repayments become larger than the stock of new loans created it is deflationary for assets like housing/property etc, which are the collateral for most commercial bank loans.

            The Govt could create money (and many have done throughout history) but fiat money is based on trust and nothing else. Fiat money systems always fail eventually – but they fail much more quickly when there is no system by which it can be held to account. Credit aggregates are published by the RBA and we know exactly what size their balance sheet is so we can measure the rate at which the currency is being debased. If everyone knew the Gubmint were printing money – but had no clue how much – the local currency would become worthless very quickly.

  3. Less Woke More BlokeMEMBER

    Would the IPA seriously prefer that federal government cut spending? This would be a terrible idea as it would send the economy into an austerity-led depression, driving unemployment into the stratosphere, causing widespread business failures, and tanking tax receipts.

    Well, quite.

    And the problem is?

    They probably want Newstart cut to 0 and b$gger the civil unrest and misery.

  4. Net govt debt is more important. ie net with how much the RBA has bought through QE.
    Now that the RBA has started QE, it is unlikely that they can ever stop so they can actually buy all the outstanding Govt debt and therefore net govt debt will reduce to ZERO.
    Just like in Japan and just like in the USA and just like in Europe.
    There is NO govt debt!

  5. “The alternative is much slower growth, rising unemployment, rising business failures, and thousands of Aussie being needlessly thrown into poverty.”

    This is baked in, the question is what cards does the individual play with this certainty.

  6. Intentionally borrowing a lot while knowing it will never be repaid is like intentionally blowing up the system by causing unsustainable inflation at some point (Germany 20’s or Zimbabwe style). This basically constitutes the transfer of wealth from cash savers to debtors and asset owners (a political choice), and also causes massive societal instability/revolution in the longer run. I don’t think this is a responsible course of action even in the current situation.

    The Gov can borrow, but any spending still should be only towards temp income support (in exchange for useful work), and productivity improving investments (not subsidising more cappuccinos). Building more houses in the current situation is OK, as it improves the balance between house supply and demand given the current net populuation growth; and may ease house prices later on once those builds are finished.

    So far the Gov has done very, very little to actually improve/reform AU society in such a way that productivity is improved. The world soon may face war with a nation capable of installing a bridge in 1 day or building a emergency hospital in 10 days; AU has to re-invent itself in order to have any chance at all to stay independent.

  7. $76 each a week forever.

    Say a Trillion or $1,000,000,000,000 XImatosis China Virus impact new debt.
    And to keep it simple, say 0% interest.

    / 25,000,000 people onshore in Australia as no net new immigrants as the virus will continue for years =$40,000 China virus debt each.
    / 10 years = $4,000 each
    / 52 weeks = $76 a week each

    Of course that $1 trillion will be long gone, wasted on a premature and totally ineffectual virus ‘pre pandemic panic’.

    Globally the official China Virus infected is now 36 million with 350,000 a day in ‘offical’ new infected. Unofficial estimates are up to 1 million a day new infected, as most of the world has lost control in testing.

    And that number will keep rising as XImatosis or theChinese Virus chomps thru it’s new human host globally. 100 million, then 1 billion by mid 2021 then 5 billion by later next year.

    The only thing restricting the Chinese virus spread into the little Australia bubble is the reduced number of migrant travellers coming in.

    But it’s still leaking thru, 90% of virus cases remain as migrants / migrant travellers.

    And our vast migrant slums in Sydney and Melbourne with over 2.5 million third world non citizen TR on pretext visas working illegally / stand poised as the china virus still swirls around in the migrant incubator zones and then as vector to infect all Australians.

    And 90% of the dead?
    Old Australians infected by these migrants. Illegal working migrants in aged care, hospitals, retail and food delivery or Uber / taxi / transport.

    And as it spreads globally, the sources and vectors from overseas ( shipping, trade, goods) that will infect Australian continue to widen & will eventually overwhelm.

    We have 2.4 million Australians over 70.
    Another 1.1 million with major obesity, pre-morbidity & high risk of death. (ABS)
    3.5 million high risk of death from XImatosis.

    Even with best class health care & drugs etc at least 10% or 350,000 can be expected to die.

    👉🏾Once the virus really hits Australia in rates like the US or Europe / UK early to mid 2021 until at least 2023 or longer – it will be another trillion needed.

    So double it to $150 a week debt repayments each – forever.

  8. Sorry but printing money and acquiring massive debt is a very bad idea for many reasons.
    Number 1 is inflation.
    Number 1 also is we will be owned by a foreign power who will demand more military bases on our soil to make sure we don’t get a socialist government.
    Debt takes away our freedom as a nation.
    It seems all commentators agree throwing any amount of money in the name of ‘fixing our economy and jobs’ is justified.
    The details of the unprecedented give away of cash seem irrelevant.
    Jobkeeper and the $50k grant has handed over half a million dollars in six months to any owner of a business with 25 employees simply for a minor blip in earning for one month or quarter. These earning can be manipulated with ease to qualify.

    • Ailart SuaMEMBER

      Printing money doesn’t cause inflation. Inflation is the result of governments’ inability to manage the correct balance between supply and demand: achieved via quality education, immigration for the right purposes, keeping a lid on foreign debt through manufacturing and of course producing detailed, medium and long-term planning. I think the last governments able to handle all that caper were headed up by John Curtain and Ben Chifley. Since then, it’s basically been down hill.

      Since the hijacking of democracy by elite donors and their lobbyist parasites, the only way we’ll ever achieve quality governments, is to shine the spotlight on the Constitutions and the electoral system and turn a bunch of ‘relics’ into workable 21st century institutions

  9. As the Canberra Times pointed out the other day the deficit will be $1.3 Trillion in 2021 – which is only 50% of GDP. And GDP in 2021 is $1.6 Trillion – wait, what ? Oh right sorry – you are throwing the deficit money onto the GDP and THEN you measure it cool.

    Thats like me taking out a $50k credit card, spending $25k and claiming im worth $75k….no wait 50+25+75 is $150k – yes, I’m worth $300k

    Easy – see.

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