Public Debt: What Measures Should We Use? A Case Study of Public Debt in Mid‐ and Post‐pandemic Australia and Its Economic, Policy and Social Consequences

• Published date: 01 December 2022
• Author: Sebastian Zwalf,Robin Scott
• Date: 01 December 2022
• DOI: http://doi.org/10.1111/1467-8462.12482

The Australian Economic Review, vol. 55, no. 4, pp. 441–460 DOI: 10.1111/1467-8462.12482

Article

Public Debt: What Measures Should We Use? A Case Study of

Public Debt in Mid‐and Post‐pandemic Australia and Its

Economic, Policy and Social Consequences

Sebastian Zwalf and Robin Scott*

Abstract

The COVID‐19 pandemic saw governments

around the world suddenly accumulate sub-

stantially higher levels of public debt. We

consider the level of debt entered into by

Australia's federal, state and territory govern-

ments and compare this against three metrics

for debt sustainability. Using these measures,

we f‌ind that current and future public debt

levels sit within what is regarded as sustain-

able by scholarly and practitioner opinion.

However, we note that recent increases in

interest rates will challenge this. We conclude

by outlining a range of economic, social and

policy challenges arising from the new high

public debt environment.

1. Introduction

1.1 Public Debt

At least for centuries governments have

supported their operations through the use of

debt to make up both short‐and long‐term

gaps between expenditure and revenue (Di

Marco, Pirie and Au‐Yeung 2009). In so

doing, public debt has been central to the

formation of nation states and has been

attributed to the emergence of governing

those states through democratic means

(Eichengreen et al. 2021). In public adminis-

tration, the willingness to take on debt and the

amount of it naturally impacts the size and

scope of governments and their activities. In

economics, under the right circumstances it

can be used to expand a nation's productive

capacity.

Despite its wide use, public debt has

often drawn criticism from scholars, com-

mentators and policymakers. Different

economists have argued the case for and

against the use of public debt with argu-

ments centering around its economic utility,

economic pitfalls and intergenerational

equity. But these debates remain largely

inconclusive with evidence, where it exists,

being able to support both pro‐and anti‐

public debt positions. Much needed clarity

is further obscured by many commentators

seemingly taking positions based on

ideology rather than empirical evidence. In

Australian public debate, public debt has

* Zwalf: Monash University, Australia; Scott: Parliament

of Victoria, Australia. Corresponding author: Sebastian

Zwalf, email: <sebastian.zwalf@monash.edu.au>

The authors wish to acknowledge Adjunct Professor

Graeme Hodge, Associate Professor Paul Strangio and

Emeritus Professor David Hayward for their generous

feedback and assistance with this paper's early drafts. We

also extend thanks to Professor Ian McDonald, the

Australian Economic Review and an anonymous reviewer

for their support and feedback. The paper is substantially

improved for all feedback received. We also thank Ms

Eva Maree Zwalf and Mr Lucas Wu Peng Scott for

typographic and presentation assistance.

© 2022 The Authors. The Australian Economic Review publishedby John Wiley & Sons Australia, Ltd on behalf of The University of

Melbourne, MelbourneInstitute: Applied Economic & Social Research, Faculty of Businessand Economics.

This is an open access article underthe terms of the Creative Commons Attribution License, which permits use, distributionand

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often been weaponised, and at times grossly

oversimplif‌ied, such that debt levels are in

and of themselves often interpreted to be a

proxy for national economic success or

failure.

1

1.2 A Brief History of Australian Public Debt

Neoliberal economists have taken a highly

critical stance on public debt. But even

prior to the emergence of neoliberal eco-

nomics, public debt has often been

an acrimonious subject in Australian public

discourse. Pre‐and post‐federation

Australia saw public controversy about

debt levels accrued by the infrastructure

programs of the Australian states and their

forerunner colonies with questions raised

about their eff‌icacy (Cox 1902). In 1930,

the build‐up of World War I and other

debts, combined with the onset of the

Depression, resulted in the government of

the United Kingdom conducting a review of

the Antipodean public debt situation, re-

sulting in the fall of both the federal and

New South Wales governments of the day.

Subsequently, Australia's public debt ex-

panded substantially again during World

War II, peaking in the 1950s and 1960s,

and slowly declining, albeit in a non‐linear

fashion thereafter. In the 2000s, Australia

momentarily eliminated its net debt

(Di Marco, Pirie and Au‐Yeung 2009),

although debt levels increased during the

global f‌inancial crisis (GFC) and have

increased again in the period since, in part

due to the policy response to COVID‐19.

Notably, during the GFC, when many other

nations were experimenting with tenets of

f‌ledgling modern monetary theory (MMT)

in the form of quantitative easing—the

expansion of the money supply through

the central bank purchase of government

bonds—Australia eschewed this. This re-

luctance was overcome in the current

pandemic with the Reserve Bank of

Australia (RBA) buying up as much as

$350 billion of state, territory and federal

government bonds (Finlay, Titkov and

Xiang 2021).

1.3 The Impact of COVID‐19

In the f‌irst months of 2020, the COVID‐19

pandemic (‘the pandemic’)grippedlarge

parts of the world—including Australia—

wreaking havoc on health systems and

national economies. Governments responded

in four key ways: (i) business activity was

curtailed to avoid viral spread, (ii) public

health expenditure was increased, (iii)

governments invested heavily in f‌iscal sti-

mulus by way of new welfare programs and

(iv) governments commissioned new infra-

structure projects and upgrades to address

the anticipated economic downturn. In addi-

tion, central banks—including Australia's—

reduced their overnight cash rate, targeting

lower interest rates. In Aust ralia, t he re-

sponse was robust on all fronts. The federal

government supported the newly unem-

ployed with historically generous welfare

payments (JobKeeper and its sister pro-

gram, JobSeeker) and state and territory

governments committed to at least $46

billion of new infrastructure initiatives

(Infrastructure Partnerships Australia

2020). Other smaller stimulus initiatives

at both state, territory and federal levels

were approved too. In the face of curtailed

economic activity, government balance

sheets were forced to make up for revenue

shortfalls and to fund new expendi-

ture through increases in public debt; they

were comforted in doing so by historically

low interest rates, keeping the cost of debt

low. Table 1 demonstrates the signif‌icant

increase in net debt for Australian govern-

ments (federal, state and territories) from

before and after the start of the pandemic

and projections for net debt in the years

following. It shows Australian government

1

In the 1990s, small government and anti‐

debt fervour even played a role in the

creation of public–private partnerships

(PPPs), a new infrastructure delivery

model, as governments sought new ways

to avoid debt (Zwalf 2020).

442 The Australian Economic Review December 2022

© 2022 The Authors. The Australian Economic Review published by JohnWiley & Sons Australia, Ltd on behalf of The

University of Melbourne, Melbourne Institute:Applied Economic & Social Research, Facultyof Business and Economics.