Debt To Hit $2.05 Trillion, 60 Years To Pay Off

Modelling by the free market think tank the Institute of Public Affairs, based on data from the Commonwealth Government Budget and the Australian Bureau of Statistics, estimates that:

• Gross Commonwealth government debt will peak at $2.05 trillion in 2045.
• Gross Commonwealth government debt will not be paid off until the year 2080.
• A Budget Surplus will not return until 2046.

For the purposes of comparison, Australia’s current annual Gross Domestic Product (GDP) – which measures the value of all goods and services produced – is approximately $1.9 trillion.

The IPA modelled two scenarios. The first scenario is based on the aggressively optimistic economic growth and budget deficit reduction assumptions contained in the Commonwealth Budget released last night, while the second scenario provides a more realistic scenario of lower GDP growth and a slow path back to a budget surplus.

“The devastating lockdown measures have caused a humanitarian tragedy, and the debt Australia has gone into to pay for them will last generations,” said Cian Hussey, Research Fellow at the IPA.

Scenario 1

• Nominal GDP growth of 5%, as assumed in the Budget from 2023-24.
• Return to surplus 2038-39 based on deficits falling at a constant rate of nominal GDP as forecast in the budget.
• Gross debt peaking at $1.92 trillion in 2037-38.
• Surpluses stabilising at 1% of nominal GDP by 2043-44. This is equivalent to the average surplus as a percentage of nominal GDP under Howard and Costello.
• Gross debt paid off in 2062-63.

Scenario 2

• Long-term nominal GDP growth of 3%.
• Return to surplus 2045-46 based on a slower rate of declining deficits.
• Gross debt peaking at $2.05 trillion in 2044-45.
• Surpluses stabilising at 1% of nominal GDP by 2051-52. This is equivalent to the average surplus as a percentage of nominal GDP under Howard and Costello.
• Gross debt paid off in 2079-80.

Scenario 2 is more realistic as it assumes that the Australian economy will grow at a more modest rate post COVID-19. Research and analysis by the Institute of Public Affairs has demonstrated how the lockdowns have permanently distorted the Australian economy through the disproportionate impact they have had on jobs, young Australians, small businesses, and the self-employed.

Consequently, the Australian economy is likely to have a much larger public service, a smaller private sector, and for larger businesses to account for a greater share of employment and output than in the past. This will lead to a less dynamic economy, with slower long-run economic growth.

“It is unlikely that all federal debt will be paid off until 2080, meaning that our children and grandchildren are going to be footing the bill for the lockdown measures which have smashed the private economy,” said Mr Hussey.

“This extraordinary debt will be paid by mainstream Australians who suffered the most during the lockdown measures. Almost 20,000 new public servants have been hired since March while 600,000 Australians employed in the private sector have lost their job.”

“The only hope for Australia paying off this debt is for the Morrison government to rein in the size of government, implement real spending restraint, and to pursue record economic growth based on massive cuts to red tape and taxes,” said Mr Hussey.

Modelling assumptions explained:

Scenario 1 relies on key assumptions outlined in the 2020-21 Budget. The budget deficit falls by an average of 0.2% of GDP between 2023-24 and 2030-31, which was extrapolated to give a balanced budget in 2038-39 and a surplus of 1% of GDP in 2043-44. From then, the surplus is assumed to remain at 1% of GDP until gross debt is paid off in 2062-63. Total gross debt is assumed to be $1.7 trillion in 2030-31, as forecast in the budget, and from then the deficit or surplus in a given year is added to gross debt from the previous year to give a new total gross debt figure. The GDP growth assumption of 5% after 2023-24 is based on the assumption set out in the Budget.

In Scenario 2, the budget deficit falls by an average of only 0.15% of GDP after 2030-31 until it reaches a surplus of 1% of GDP in 2045-46. This slower decline is based on the Commonwealth not being able to reduce the deficit after 2030-31 as rapidly as in Scenario 1 due to the assumption of slower economic growth. Total gross debt is assumed to be the same as in Scenario 1 in 2030-31 ($1.7 trillion), and from then the deficit or surplus in a given year is added to gross debt from the previous year to give a new total gross debt figure. The long-term GDP growth assumption of 3% is based on a lower than expected economic growth rate due to the distortions caused by lockdown measures and the possibility of future economic shocks.