Interest on government debt: Much ado…?

by David Richardson

Treasurer Jim Chalmers continues the long tradition of treasurers complaining about the size of the government debt and the interest payments on that debt.

Treasurer Chalmers was reported as saying that Australia is “heaving with a trillion dollars of debt” and “The cost of servicing the debt left behind by our predecessors is one of the fastest growing pressures on [the] budget.”

One of the effects of the Reserve Bank increasing interest rates is that it has increased how much the government has to pay on its borrowings, just like homebuyers have to pay more on their mortgages.

The Budget has now put the 2023-24 interest payments at $22.6 billion on gross debt of $923 billion or 35.8 per cent of GDP.[2] However, hidden away in Statement 11 of Budget Paper No. 1 we find net debt is $574.9 billion or 22.3 per cent of GDP and interest on that net debt is expected to be just $13.4 billion. Just going from gross debt to net debt almost halves the headline figures. However, there is more.

As of 28 April 2023, the Reserve Bank itself held $270.7 billion in Australian Government bonds or almost half the net debt expected on 30 June 2023. The Reserve Bank is owned by the government, so in effect the government owns almost half of its own net debt. It also means that when it pays interest on that debt it is paying that interest to itself. Those interest payments then tend to be returned to the budget as dividends from the Reserve Bank.

Finally, a lot of the government debt supports other investments such as shares, property etc. held by the Future Fund as well as government business enterprises such as the Post Office, the Mint and so on. All these produce income for the government.

All in all, when you break it down it makes you wonder what all the fuss is about.

[2] There is a minor difference in the interest expense recorded in Statement 6 compared with Statement 11, both in BP No 1. Note that debt figures attributed to a budget year are the final figures on 30 June of that year.

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