Tuesday, April 30, 2013

Real Cost of Government Debt

..." the cost of servicing the existing debt is nearly $14 billion annually or otherwise, the equivalent of $38 million dollars a day in interest charges..."

The level of Government debt stands at just over $274.6 billion and while it is very high, the figure does not surprise me given that last August I noted that it was just shy of $245 billion. While defenders of present debt levels will argue that it is small in terms of GDP ratios, this line of argument provides little comfort given yesterday’s deficit news.

I have several concerns; in the first case, its rate of growth is alarmingly high, having risen a confounding 75% in the past two and a half years. I am also becoming uneasy about the cost associated with servicing this debt. 

Federal borrowings come at a price in the form of interest by taking an ever-increasing slice of revenues. Even when we account for our record low rates, the cost of servicing the existing debt is nearly $14 billion annually or otherwise, the equivalent of $38 million dollars a day in interest charges.

If the Government had been more prudent (smart) and, for example, limited debt growth to half present levels, then the interest saved in just 3 years would amount to around $21 billion.

NDIS and Gonski Reforms

Now some perspective, this saving would pay for the National Disability Insurance Scheme (NDIS) $6.8 billion and the Gonski reforms $6.5 billion and still leave around $7.5 billion in change. Moreover, the two reforms paid without any levy or money from States and Territories. I am not advocating for either of the two reforms however, the citation drives home my point.

More disturbing still, the cost of servicing the debt is on track to rise to as high as $20 billion by 2016 in line with further projected increases in debt. All the while, I am assuming -perhaps incorrectly- that existing interest rate levels will remain low indefinitely.
 
To think, we had zero debt as recently as 2007.