See a recent article by Saul Eslake, a really good and practical economist, who sets out the following interesting points regarding Australian debt over the past 60 years. This is a very short read, so won’t take long.

Key points are:

• Some countries currently have debt levels at 80% of GDP
• If Australia spends heavily to avoid serious problems, we could end up with a debt level at 50% of GDP
• After WW2, Australia had a debt level of 150% of GDP
• Australia only ran 1 budget surplus between 1945 and 1989
• The value of the debt reduced from 150% of GDP to 20% of GDP by 1989 because the economy grew in dollar terms
• Families feel the need to pay down debt because people die (people want to pass on assets rather than debts)
• Governments do not die, so they do not necessarily need to pay off the debt

 
My other thoughts around government debt in a time like this:

Currently, money is very cheap (historically low interest rates)

• We can repay the debt over the next 25 years (50 if need be)
• There is such a thing as “good” debt
• If the $ are spent on the right things, such as long term infrastructure projects
• If the $ are spent with the express intention of keeping employment as high as possible:
• By directly employing people in the infrastructure/government projects
• By subsidising employers to retain staff during difficult times
• We currently have no further levers to pull from a Monetary policy perspective (interest rates), the only way here is to undertake Fiscal policy measures (government spending)
• The government cannot allow the economy grind to a halt – it is extremely difficult to get things going again if the economy does stop

That’s my 2 Cents on the situation.

If you want to chat about any of this, and how it might affect you, call us (SaabTeece) on 9784 2000, and we will give you more than 2 Cents.

Andy Teece