INTHEBLACK April/May 2024 - Magazine - Page 44
F E AT U R E
“There is no rule of economics or public finance that says
the optimal level of debt for a government is zero.”
SAUL ESLAKE, ECONOMIST
“There is no rule of economics or public
finance that says the optimal level of debt
for a government is zero.”
Eslake says it is entirely rational and
appropriate for governments to fund at least
some of their infrastructure spending by
borrowing, because the infrastructure will
presumably benefit future generations
of taxpayers.
“Requiring those future generations to service
debt that has been used to fund some of that
infrastructure is a way of making them pay for
it, rather than if governments always ran budget
surpluses and didn’t have any debt,” he says.
“So, there’s no requirement that all the
debt be paid off. How much debt should
be paid off really depends on what you
think is an acceptable proportion of revenue
to devote to interest. Some governments
use rules of thumb like between 4 per cent
and 6 per cent or so of revenue.”
A MATTER OF INTEREST
High debt levels translate into high
interest payments. In the lead-up to the
2023–24 Federal Budget, Treasurer Jim
Chalmers revealed that interest payments
on Australian government debt will cost
taxpayers A$112 billion over five years.
That equates to more than A$61 million
per day – even with the significant financial
benefit flowing from Australia’s strong AAA
credit rating assigned by global agencies
Standard & Poor’s (S&P), Moody’s and Fitch.
In assessing the ability of governments to
service and repay their debts, credit rating
agencies examine both the total level of
outstanding debt as well as the interest rates
being paid on that debt. Most governments
value their outstanding debt based on
prevailing bond market prices.
S&P analyst Anthony Walker says
the economic outlook for Australia is
sound, although real GDP growth will
slow in response to the Reserve Bank’s
interest rate actions.
“Australia’s economy will likely avoid
recession and expand over the next three
years. This reflects low unemployment
and high commodity prices. Australia
benefits from being a net energy exporter.”
44 INTHEBLACK April/May 2024
Walker says the budget deficit and total
government debt are on track to improve
over the coming years.
“Reinforcing our assessment of Australia’s
fiscal position is our view that it has
displayed more willingness than its peers
to raise revenues and contain expenditures.”
PAYING IT BACK
When bonds are issued by governments
and corporates, the investors buying them
effectively lend their money in return for set
regular fixed interest payments and the full
repayment of their capital if they hold their
bonds until the issue’s maturity date.
A burning question may be, how long do
governments have to repay their debt?
In Australia’s case, the bulk of bond issues
by AOFM are in the 10-year maturity range,
although the issuer now also has a 30-year
bond program in place with a June 2051
maturity date.
That is a long investment duration –
and a long government repayment plan –
but it is nowhere near as long as some other
government bond issues launched during
the pandemic.
Indonesia, for example, went to the bond
market in 2020 with a 50-year bond issue to
raise US$1 billion (A$1.51 billion), the first
of that duration in Asia. Israel topped that by
issuing its first 100-year bond, also to raise
US$1 billion (A$1.51 billion), followed by
a 40-year issue to raise a further US$5 billion
(A$7.55 billion).
The bottom line is that governments
issuing debt securities have total control
over their own repayment terms.
Consider that the UK has only recently
started paying off a consolidated loan as part
of a redemption of multiple bond programs
spanning back 300 years. They include bonds
issued during the 1720 South Sea Bubble
financial crisis, the 1815 Battle of Waterloo, the
Crimean War against Russia in the mid-1850s
and bonds issued during the First World War.
It is a salutary lesson. While COVID may
be forgotten decades from now, the pandemic
will likely live on for future generations of
taxpayers as governments slowly pay off their
accrued liabilities.
