Australia’s national debt continues to grow at a frenetic pace, rising 4.6% in 2022 to a record of A$1.45 trillion according to Janus Henderson’s 2023 Sovereign Debt Index.
Government finances across the globe were subject to dramatic changes in 2022 and 2023, and Australia has been no exception.
By the end of last year, the total value of global government debt had leapt by 7.6% on a constant currency basis to a record US$66.2 trillion1 2, double its 2011 level.
Costs are mounting sharply. Government interest bills jumped by almost over a fifth in 2022 (+20.9% constant currency basis) to a record US$1.38 trillion. This was the fastest increase since 1984 and reflected both rising rates and the swelling stock of sovereign borrowing. The effective interest rate3, which includes older, cheaper borrowing, rose to 2.2% in 2022, up by one seventh, year-on-year.
Australia’s debts have grown very fast from their low pre-Global Financial Crisis baseline. Since 2007, Australian debt has expanded ten-fold, compared to a tripling of global government debt on a constant currency basis. Today, each Australian owes A$55,550 in government debt.
Last year, Australia paid A$20 billion in interest, up from a record low of A$8 billion in 2020. With interest rates already sharply higher so that new and maturing bonds are financed at higher cost, Australia’s interest bill is set to more than triple by 2025, meaning interest expenditure in that year will be approximately eight times higher than in 2020.
The Reserve Bank of Australia is in the same boat as many other central banks around the world and has already reported an accounting loss of A$37 billion on its quantitative easing bond holdings. The RBA will also experience cash costs on the maturity mismatch between bond holdings and interest paid on the resulting deposits.
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Australia has a relatively long maturity profile however, with only half its bonds needing refinancing in the next six years, similar to Switzerland.
Jay Sivapalan, Head of Australian Fixed Interest at Janus Henderson said: “Compared to GDP, Australia’s debts sit below the global average and are significantly lower than their industrialised peers. Looking ahead, governments, including Australia, will have an increasing debt servicing impost which will need to be recouped from tighter fiscal policies and ultimately taxpayers. This has implications for consumption and economic growth.”
Jim Cielinski, Global Head of Fixed Income at Janus Henderson said: “The level of government debt and how much it costs to service really matter to society, affecting decisions on taxation and public spending and raising questions of generational fairness. Since the Global Financial Crisis, governments have borrowed with astonishing freedom. Near-zero interest rates and huge QE programmes by central banks have made such a large expansion in government debt possible, but bondholders are now demanding higher returns to compensate them for inflation and rising risks, and this is creating a significant and rising burden for taxpayers. The transition to more normal financial conditions is proving a painful process.
“We expect the global economy to weaken markedly in the months ahead, and for inflation to slow more than most expect. The market expects the world economy to have a relatively soft landing – a slowdown in growth, but no outright contraction, except in a handful of national economies.
“We believe this is incorrect. The sheer volume of debt owed by governments, corporates and individuals nevertheless means that rates do not need to climb as far as in the past to have the same effect. The interest rate tightening cycle is nearing its end.
“Investors stand to benefit. Bonds of all maturities are likely to see yields fall in the year ahead, meaning prices will rise. Short-dated bonds offer higher yields at present because they are more closely connected to central bank policy rates. This is good for those wanting income and tolerating lower risk, but they will see less capital appreciation. The scope for capital gains is significantly greater for longer-dated bonds which we expect to perform very well in the next year as the economy comes under pressure.”
Source: Janus Henderson Investors
1. Constant currency: Stock of debt uses 2022 year-end exchange rates; interest costs use average exchange rates through 2022
2. Gross debt
There is no guarantee that past trends will continue, or forecasts will be realised.
3. Interest bill over the year divided by stock of debt
