Australia’s Public Debt Nears $1 Trillion, Projected to Hit Levels Not Seen Since WWII
A synthesis of recent financial analyses indicates that Australia's combined federal, state, and territory government debt is projected to reach levels not seen since World War Two, while the federal government's gross debt is approaching $1 trillion.
Debt Projections
According to a report by the economic think tank e61 Institute, Australia's combined government debt across all levels could reach 37 percent of Gross Domestic Product (GDP) by 2028. This would represent the highest debt-to-GDP ratio since the Second World War.
Separate analysis of federal finances shows that Australia's gross debt is forecast to reach $1 trillion in the coming months.
When measured against the size of the economy, this level is relatively low compared to other wealthy nations. The federal gross debt is projected at 34 percent of GDP for the upcoming financial year, with net debt at 19.9 percent of GDP.
Drivers of Rising Debt
Public expenditure by all levels of government has increased significantly, from 34.7 percent of GDP in the early 2000s to 38.2 percent in 2024.
Major areas of spending include:
- Social services: The largest category, comprising approximately one-quarter of total outlays, including welfare benefits, childcare assistance, and the National Disability Insurance Scheme (NDIS).
- Health: The second-largest category, with per capita expenditure having doubled since 1999.
- Education: The third-largest category, where spending has remained stable since 1999.
The e61 Institute report attributes the expansion in social spending to a shift away from tightly means-tested benefits towards 'in-kind' support with broader eligibility, such as the childcare subsidy and the NDIS.
Political and Market Context
The federal government's approach to managing the budget has been subject to differing assessments. Budget papers indicate that interest payments on the debt are growing faster than spending on hospitals, defense, childcare, or aged care over the medium term.
Michael Brennan, CEO of the e61 Institute, suggested that tax reform and spending restraints are potential strategies for the government to reduce debt. Other analysts have noted that the federal budget's structural improvements were well received by bond markets, narrowing the yield gap between Australian and 10-year US bonds.
The debt level has not returned to pre-pandemic levels as in past economic recoveries, partly due to increased spending on defense, green energy transition, and an aging population. Global public debt has risen universally, making relative comparisons more favorable for Australia.
Structure of Government Debt
Government debt is primarily owed to investors, both domestic and international. In Australia, borrowing occurs mainly through Commonwealth Government Securities (bonds and Treasury notes) and state 'semi-government' bonds.
Creditors include:
- Domestic institutional investors (superannuation funds, banks, insurers, asset managers)
- Foreign private investors (overseas pension funds, insurers, global asset managers)
- Foreign central banks (holding Australian government bonds as foreign exchange reserves)
Interest Costs and Economic Implications
Rising bond yields due to global inflation fears could increase interest costs further. Independent economist Chris Richardson stated that future taxpayers, including younger generations, will bear these interest costs. AMP chief economist Shane Oliver noted that high debt reduces the government's fiscal capacity to respond to economic crises, contrasting it with the period before the 2008 financial crisis when net debt was zero.
Flavio Menezes, an economics professor at the University of Queensland, explained that countries incur debt to finance budget deficits when government spending surpasses revenue from taxes and royalties. He noted that budget deficits can be necessary for financial support during major shocks such as natural disasters or pandemics.
Menezes stated that global 'shocks' of recent years complicate debt management, including the energy transition, the financial crisis, the COVID-19 pandemic, population aging, slowing global trade, and increasingly fractured geopolitics.
He indicated that higher public debt is, to some extent, unavoidable due to ongoing global uncertainty.
Potential Outcomes
The ultimate impact of debt depends on how it is utilized. If public debt finances productive investment and supports long-term growth, it may not undermine living standards. However, if debt funds low-return spending in a low-growth environment, it could exert sustained pressure on future incomes, public services, and living standards.