To be clear, Australia has a low level of public debt when compared to most other developed countries, but private debt is extremely high. Indeed, Australia is more (privately) indebted than it has ever been in its history.
The two other occasions when debt has been high have been before the 1890s and 1930s depressions. The 1890s revealed how external developments could exacerbate domestic economic problems. During the 1880s, servicing Australia’s debt increased from 15 to 40 per cent of export earnings. And when the British bank Barings nearly went bankrupt through bad deals in Argentina, British investors did the sort of wholesale reassessment of developing country investments that has been common in recent years at times of crisis. The substantial decline in the demand and price of commodities, and the decline in foreign sources of capital, intensified the problems caused by over-expansion in the wool industry, property speculation (especially in Melbourne), banking collapse and over-investment by colonial governments in infrastructure.
Public debt during the Great Depression of the 1930s was high – about 128 per cent of GDP – because of government efforts to develop the economy through the provision of infrastructure and support. Rolling over debt was no longer possible after the crash of 1929 and debt servicing as a percentage of export grew steadily during the 1920s, reaching a peak of 50 per cent in 1931 and remaining over 30 per cent for most of the 1930s.
Foreign debt was a major policy concern of the late 1980s and early 1990s. It seems, however, that concern about debt has lessened as the debt has risen and it has risen almost continuously from the mid-1970s (see graph).
Percentage of GDP
Australian General Government Sector Net Debt
Interest Payments to Disposable Income
The second graph shows the percentage of disposable income spent on interest payments. Despite interest rates reaching unprecedented levels in the late 1980s, interest payments as a percentage of disposable were much higher in the 2000s. The Reserve Bank’s 4.25 per cent reduction in interest rates over late 2008 and early 2009 acted to substantially reduce interest payments. Now that interest rates are once again on the rise, interest payments as a percentage of income will also increase.