The Looming Iceberg: Australia’s post-pandemic debt risk

After many years with low public debt, Australia is seeing a much higher debt burden as a result of the coronavirus pandemic. In the years ahead, according to recent budget estimates, it will reach close to $2 trillion in aggregate at the Commonwealth and state/territory levels of government. This poses a risk to economic growth in the longer term and reduces fiscal flexibility and the capacity to respond to future crises. Much of the increase since the pandemic has been unavoidable, but reversing it should be a policy priority once its underlying causes have passed.

The confidence often heard expressed that the debt burden will be manageable in the long-term should be heavily qualified. A steep decline in the debt burden such as was seen after World War II will depend on vigorous economic growth, continuing very low interest rates and the exercise of fiscal discipline, none of which is assured.

Among the states and territories, the largest deterioration in public finances is occurring in Victoria.