Australia’s next Prime Minister will inherit significantly elevated levels of national debt with the Coalition Government having accumulated around $300 billion worth of additional debt during the COVID pandemic.
But how bad is all this debt and does it mean young people will face higher taxes in future to pay it off?
And if Australia’s low debt levels of the early 2000s are consigned to history, are young Australians facing decades of economic austerity?
Not necessarily, argue Professor Tom Smith and Hamid Yahyaei from the Macquarie Business School Department of Applied Finance.
Yahyaei says it is important to view Australia’s Government debt as a proportion of Gross Domestic Product – which remains low by global standards.
It is important that the next Government adopts an open mind to invest in promising technologies and industries.
“Compared to aggregate economic activity, Australia’s debt levels are far lower than other economies,” he says.
“More importantly, the Government can service this debt comfortably, given the swift economic recovery from the pandemic, a resilient business sector, and Australia’s status as one of the few ‘AAA’ rated economies, all of which underpin a solid trajectory.
“While the size of the debt burden is a crucial element, the true test for the Government is to maintain its capacity to service the debt as robustly as possible.
Forward focus: Professor Tom Smith says renewable energy and blockchain technology are among the promising industries Australia needs to take advantage of.
“The Australian economy has historically benefited from a flourishing housing market, a booming resources sector and a world-class superannuation system – all of which have contributed to our economic prosperity.
“It is important that the next Government has the vision to transition our economy – whichever party wins power. We must prepare for the challenges that lie ahead. Only with a solid vision for the future can the Australian economy prepare for the external shocks that will drive the course of history.
“We’ve seen the incredible benefits that come with innovative reform, such as the superannuation reforms during the 1990s, and it is important that the next Government adopts an open mind to invest in promising technologies and industries, ensuring the country remains as competitive as possible,” he adds.
Head of the Department of Applied Finance Professor Tom Smith says renewable energy and blockchain technology are among the promising industries Australia needs to take advantage of going forward.
“Australia is leading the world in FinTech and this will lead to increases in wealth and taxes which will help service debt levels going forward,” Smith says.
Dollar signs: Importantly, says Hamid Yahyaei, the Government can service its debt easily.
“Australia is now part of the net zero by 2050 movement and given our abundant natural resources of sun, wind, and waves, Australia can be a leader in this space. This technological revolution has the potential to generate more than $20 trillion worth of increased wealth.
“It is important to understand the nuances when thinking about debt. While substantial debt levels that put Australia’s economic standing at risk can present challenges, the key factor remains whether our Government can service this debt in the long-term.
“The best way to ensure they can is by investing in industries that will yield major benefits in the future – both financially and environmentally,” he adds.
Professor Tom Smith is Head of Department in the Department of Applied Finance at Macquarie Business School.
Hamid Yahyaei is a Specialised Lecturer and Senior Researcher in the Department of Applied Finance at Macquarie Business School.
