Overview

The coronavirus pandemic and associated policy responses have led to the largest deterioration in the Commonwealth Government’s fiscal position since the Second World War.

Gross debt has increased from 28 per cent of GDP before the pandemic to over 40 per cent of GDP in 2020-21, and is expected to increase to over 50 per cent of GDP in 2022-23. The government projects debt will remain above 50 per cent of GDP for at least the next decade.

Public debt levels may become concerning if they result in governments having to devote an ever-increasing share of their revenue to meeting their interest expenses, leading in turn to a need to significantly increase taxes, cut spending, sell assets and/or further increase debt.

This report examines the sustainability of the government’s fiscal position by calculating future paths for debt under various scenarios …

The long-run path for the debt-to-GDP ratio depends on three factors: economic growth, interest rates and the government’s budget balance. This report shows the trajectory of the debt-to-GDP ratio for a range of scenarios based on the degree that these three factors have varied over time. We calculate the long-run size and growth of the economy through the ‘three Ps’ framework: population, participation and productivity, similar to the approach used in budget papers.

… indicating that the government’s fiscal position is sustainable in the long term …

Our scenarios for GDP growth, interest rates and the budget balance suggest that the government will be able to maintain a sustainable level of debt relative to GDP over the coming decades.

We present 27 different scenarios, showing government debt stabilising or falling beyond the next decade. Debt interest payments also remain manageable. Only the highly unlikely scenario of a generation of low economic growth combined with high interest rates and large budget deficits results in debt increasing as a share of GDP, after 2050.

The scenarios also show that a sustainable fiscal position can be maintained even if the budget remains in a modest deficit position over the long term, although reaching that position will require governments to continue to increase revenue and/or contain spending to return the budget balance to the average levels recorded over time.

… but the level of debt is likely to remain high for a generation.

Reducing the government debt-to-GDP ratio to pre-pandemic levels will take decades, even under relatively optimistic scenarios. However, debt servicing costs should remain subdued as the existing debt was borrowed at historically low interest rates.

This report presents the Parliamentary Budget Office’s framework for assessing fiscal sustainability, and uses this to assess fiscal sustainability in the aftermath of COVID-19. Using this framework, we analyse the trajectory of the debt-to-GDP ratio under different scenarios. This report follows our two Medium-term fiscal scenarios reports (June and August 2020), based on the RBA’s economic forecasts, and our Medium-term fiscal projections report (December 2020) based on the 2020-21 Budget. Our fiscal sustainability analysis will be updated with future editions of our annual Medium-term fiscal projections report. The next edition of that report is expected to be released later this year.

Download the full report above.