Remember Long Covid? Medical experts still debate its provenance and prevalence, but when it comes to state and federal governments the affliction is very real, albeit mercifully in remission.
Come 2030 and beyond, though, it’s guaranteed to flare up with a vengeance. Our governments borrowed like there was no tomorrow during the Covid pandemic, issuing hundreds of billions of dollars’ worth of bonds during 2020 and 2021 at ultra-low interest rates to “keep us safe”.
The full price of that dubious safety is yet to be paid, years after anyone who was “saved” has long passed away.
The federal government’s gross liabilities this week bobbed above $1 trillion for the first time, but that’s only the tip of the growing debt iceberg.
For a start, state governments’ non-financial public sector balance sheets reveal another $706bn as of June, and those debts are no less “public” than Canberra’s.
But even those figures underplay the challenge ahead, obscuring the great Covid debt refinancing cliff that awaits beyond the customary four-year budget forecast period.
The four biggest states have almost $277bn of bonds outstanding, with coupons, or interest costs, averaging around 2 per cent, according to new research by the Institute of Public Affairs, released this week.
When those sweet deals progressively expire from 2031, they’ll need to be refinanced at current long-term borrowing rates, which for state governments are around 5.5 per cent for 10 years, adding well over $8bn a year to their annual interest costs.
Each of NSW and Victoria, for instance, will be up for an extra $2.7bn a year from 2030 onwards, even if they decided to abruptly become fiscal saints and never run a cash deficit again.
This will amount to around a 25 per cent jump over and above the $11bn of interest costs they’ve each budgeted for the 2030 financial year.
To put that in perspective, the entirety of Victoria’s payroll and insurance taxes will be just about enough to cover the state’s annual interest bill.
South Australia’s annual interest burden would be able to fund its police force more than twice over.
The commonwealth faces the same problem, too, having around $280bn of cheap Covid-era debt on the books at a coupon of 3 per cent or less.
Toby Johnston, former chief economist of the Future Fund, estimates those bonds will cost an extra $9.5bn a year from 2030 on, assuming the federal government faces today’s prevailing 10-year yield of 5 per cent.
Of course, interest rates could well be higher still, given grim forecasts embedded in practically every government balance sheet in the developed world.
“The global bond market is sending a clear signal to all governments – get your house in order or face much higher debt service costs,” Johnston, now director of Westwood Strategic Advisers, tells me.
“Every additional dollar spent servicing past debt is a dollar that cannot be used to fund services, reduce taxes or invest in the national’s future,” he adds.
Even before the great Covid refinancing cliff begins to ratchet up, combined state and federal debts will push past $2 trillion, according to forecasts by the Parliamentary Budget Office released this week.
Almost certainly this will understate the actual fiscal deterioration, given the “degree of systematic optimism” built into budget forecasts, as PBO chief Sam Reinhardt put it in a speech last month.
Budget forecasts assume no new spending, which “rarely eventuate(s) in full because governments later announce new programs, extend existing ones, or respond to emerging pressures”, she added.
One good example is the National Disability Insurance Scheme, which was meant to have around 300,000 participants, rather than the 780,000 it had as of June.
Apologists for Australia’s soaring public debt often point to its supposedly low level as a share of GDP compared to other countries (about 50 per cent including the six states). Yet the stock of debt matters little. Canada has gross debts the equivalent to well over 100 per cent of its GDP yet enjoys a 10-year bond yield of 3.7 per cent, well below Canberra’s. New Zealand has been borrowing at a cheaper interest rate than Australia too for some time.
The world keeps Australia on a tighter fiscal leash, and for good reason: we’re a smaller, remote economy, whose economic viability would be torn asunder by a clash between China and the US in the Pacific.
Our biggest export customer is the number one geopolitical enemy of our most important military ally.
The Australian dollar isn’t a reserve currency, and we have a chronic inflation problem that predates the US-Iran war too.
A cursory look at state and federal budget management reveals appalling levels of waste and stupidity, best illustrated by the massive increases in public sector headcount and pay, at state and federal levels. Indeed practically all economic growth has been in the public sector, and in particular the highly regulated and relatively unproductive “care economy”.
The treatment for financial Long Covid will be painful, and it won’t be optional: significant cuts in spending along the lines Australia hasn’t seen before.
At least we know it will work. New Zealand in the 1980s and Canada in the 1990s offer past examples of chronically mismanaged nations that had to make radical cuts and soon returned to fiscal health.
State and federal governments have planned bond issuance this year of some $235bn, the highest amount since the 12 months to June 2021.
Back then the Reserve Bank was helping keep borrowing costs down by creating billions of dollars of new money. That will be much harder to do in coming years, given the growing loss of faith in the monetary system throughout the developed world.
At least more economic commentators are coming to realise that the nation’s real public-debt burden extends far beyond Canberra to the states. What more need to realise is that Canberra is ultimately on the hook for the lot of it.
“We’re all on this together” might have been an irritating, nonsense slogan during Covid, but it certainly applies to public debt, given the implicit guarantee the states enjoy.
