15 May 2017

Over the past week Australian shares were 0.2% higher. Shares in developed countries were 0.2% lower and the US market was 0.3% lower. Shares in emerging markets were 2.5% lower. The Australian dollar was 0.5% lower at 73.87 US cents. The 10 year bond yield in Australia was 0.02 lower at 2.63% while in the US, the 10 year bond yield closed 0.02 higher at 2.33%. The oil price gained 3.5% to 47.84 US dollars per barrel.

The Federal Budget for 2017-18 has come and gone. Although it generates a lot of media attention I tend to get less excited for two reasons. Firstly, what actually makes it through parliament can be quite different to what’s actually announced, especially given the current weak balance of parliamentary power held by the government. Secondly, the budget feels like it’s becoming ever more political.

However, there’s one aspect that I do keep an eye on, and that’s government debt. The government forecasts deficits* for the next three years of $29.4b, $21.4b, and $2.5b respectively1. These sound like large numbers however they need to be put into context. In comparison to the overall size of Australia’s economy, they’re forecast to be a total of about 2.8% of Australia’s gross domestic product (GDP)1.

Are Australia’s government debt levels too high? Probably not at the moment as our total government debt to GDP is currently just above 40%. There are many countries with far higher debt levels including Japan (250%), the USA (104%), Canada (92%) and the UK (89%). However it’s important that a sustainable strategy is in place, hence the government’s medium term plan to bring the budget back to surplus2.

In the build up to the budget there was much talk about ‘good debt’ versus ‘bad debt’. This simply relates to the use of any government deficit. Think of it from your own household perspective. Borrowing to invest in a business, buy an asset or invest in your education will likely have a greater financial return than spending it on a holiday or a large TV. Similarly spending on infrastructure projects will likely deliver long term returns back to the government compared with cash handouts. At the end of the day debt is debt, and from a debt sustainability perspective it’s better to see ’good debt’ in the form of major infrastructure projects.

Signing off

David Bell

‚Äč1 Budget 2017-18 budget.gov.au/2017-18  

2 Government debt to GDP tradingeconomics.com/country-list/government-debt-to-gdp

*Underlying cash balance 

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg.