DIMITRI BURSHTEIN & PETER SWAN: Federal debt is about to hit $1 trillion, and young Aussies will pay the price

Federal debt is about to breach $1 trillion, with no effective limits on government borrowing. Once State liabilities, household debt and rising interest costs are considered, Australia looks far more exposed than Canberra is willing to admit — and younger Australians will pay the price.

Commonwealth government debt sits at $988 billion and is on track to breach $1 trillion within weeks. It is a sobering milestone, particularly given Federal debt was effectively nil in 2007 when the first Rudd government was elected.

Since then, successive Labor and Coalition governments have pursued fiscally reckless policies that now imperil Australia’s economic resilience and living standards. It is past time to reintroduce a Commonwealth debt ceiling to restore a measure of accountability to a political class that has grown complacent about debt.

Many take comfort in the claim that $1 trillion of Commonwealth debt is manageable because it represents a smaller share of GDP than the public debt carried by countries such as the United States, Japan or parts of Europe. That argument collapses once the full picture is considered.

Add roughly $600 billion of debt held by State and Territory governments. Factor in Australia’s household debt, among the highest in the world, and the conclusion becomes unavoidable. Australia is one of the most highly indebted economies in the developed world and is living well beyond its means.

This combination leaves Australia dangerously exposed. As a small, open trading economy, Australia generally cannot set the prices of what it sells to the world. That vulnerability is magnified by the concentration of our exports, both by product (commodities) and by customer (particularly China). In such circumstances, it would not take much more than a modest external shock to trigger a serious economic downturn.

Unlike private debt, however, governments do not go bankrupt and debt automatically passes from one generation to the next. This raises a moral dimension that rarely features in budget debates. It may be politically easy, even electorally rewarding, to placate today’s voters by shifting costs onto younger Australians and those yet to be born. But burdening people who cannot vote and had no say in these decisions is not merely irresponsible; it is an act of intergenerational expropriation.

Alongside eye-watering public debt, the next generation will also receive a tax system so convoluted it could double as a punishment, a regulatory maze that smothers initiative and productivity, and an education system where mediocrity is no longer the exception but increasingly the objective. Rounding it out is a political and bureaucratic class increasingly shielded from accountability and too often failing basic tests of competence.

Australia now faces chronic and structural budget deficits, enormous national debt, one of the most fiscally irresponsible Federal Governments in decades, matched only by an Opposition so devoid of conviction it appears content to wait patiently for its turn to repeat the exercise.

Once, there were some institutional restraints. The Loans Council, which limited State and Territory borrowing, was quietly euthanised by the Keating government in 1993. In 2007, the Rudd government introduced a Federal debt ceiling. It was an imperfect mechanism, but it at least acknowledged the need for restraint. That ceiling was abolished in 2013 by the Abbott government, ironically styled as fiscally conservative, with the support of the Australian Greens.

Since then, the only remaining constraint on government spending has been the threat of a bond-market revolt.

Australia had no net debt in the mid-2000s. Today, gross debt is approaching $1 trillion. Over this same period, just two budget surpluses were recorded, both reliant on temporary revenue spikes and creative accounting.

The scale of this expansion matters. Federal spending has risen from about 24 per cent of GDP in 2005 to roughly 27 per cent today. In real terms, that represents close to $100 billion in additional annual spending. Real per capita government spending has increased by about 40 per cent over two decades.

With borrowing costs now close to 5 per cent, interest payments are rising sharply and will accelerate further as low-yield legacy debt is refinanced. This is money that could otherwise fund productivity-enhancing reform in tax simplification, education, health care or infrastructure.

Reintroducing a debt ceiling would not prohibit borrowing. It would restore a circuit breaker, a pause for reflection and a moment of public accountability. Requiring parliamentary approval to breach a cap forces debate, scrutiny and at least a pretence of responsibility.

A revived debt ceiling would also serve as a proxy voice for future generations, unable to vote today, but destined to pay the bill. It would reintroduce long-term thinking into a system addicted to short-term electoral gratification.

In 1850, Frédéric Bastiat warned: “When plunder becomes a way of life, society eventually creates a moral code and legal system that justifies it.”

Nearly two centuries later, Australia risks fulfilling that prophecy, one handout and one hollow promise at a time.

Unless accountability, fiscal restraint and basic economic literacy are restored, the legacy being left will not be a nation, but an invoice. And the kids will be left to figure out how to pay it.

Dimitri Burshtein is a senior director at Eminence Advisory.

Peter Swan is professor of finance at the UNSW-Sydney Business School