The 2015 budget confirms the Abbott government will never pay off its debt

May 12, 2015

By Stephen Koukoulas

12 May 2015

Hidden in the murky depths of the budget papers, the government has confirmed that it will never pay off its debt.

The amount of gross government debt on issue in the form of Commonwealth Government Securities is forecast to increase to $412 billion in 2015-16, before rising to $518 billion in 2018-19 and then $573 billion in 2025-26 even though the budget in the years leading up to then are forecast to be in surplus. The comparable level of debt at the time of the election in September 2013 was $273 billion at the time of the election in September 2013.

With the recent release of the Intergenerational Report, the government announced that it would keep the level of government debt at 13 per cent of GDP. The budget reiterated this change which means that the amount of gross government debt outstanding will be grow with the size of the economy, year in, year out, even when the government returns to surplus and proceeds from asset sales flow to the government and bolster the headline cash budget balance.

The reasons for the decision to never pay of debt are something that the previous government put in place in response to the demands of financial markets and regulators of financial institutions to have a well secured futures market, a longer yield curve and a riskless asset market (government bonds). The dis-function that crippled financial markets during the global crisis highlighted the importance of liquidity in government bond markets. This is why government debt will never be eliminated, despite the earlier claims of the Coalition Parties that debt elimination would be a fundamental policy priority when it retuned to power.

The outlook on net government debt is no different. Treasurer Hockey is forecasting net debt to reach a peak of 18.0 per cent of GDP in 2016-17, before it falls marginally to 16.8 per cent in 2018-19. This is more than double the estimates the government inherited in the Pre Election Fiscal Outlook when net government debt was projected to fall to around 7 per cent of GDP in 2018-19 and zero by 2023-24.

Perhaps the government has realised that government debt is not the evil it made it out to be. Like most things in life, including in managing an economy, a little bit is a good thing and despite the escalation of debt under the Abbott government, Australia’s level of government debt remains very low.