Australia Does Not Have a National Debt

Australia does not have a national debt. This might sound surprising, given how often people tell us we do. The latest version of the ‘huge debt’ scenario is to say that there is “a trillion dollars of debt and nothing to show for it.”

This is the line favoured by the Federal Treasurer. Sometimes he calls it “a trillion dollars of Liberal Party debt.” He may be correct to say that there is little to show after nine years of LNP rule. But he is wrong to say that there is $1 trillion of debt. Or any Commonwealth debt at all, actually. Let me explain.

The ‘debt figures’ you hear about refer to just one part of the Government’s overall finances. That part is officially called Australian Government Securities (AGSs) but basically consists of Commonwealth bonds. According to the Australian Office of Financial Management, total AGSs were worth $911 billion in April. This was a “record high” (although, notably, well short of $1 trillion).

In essence, a bond is an agreement in which an investor, say a commercial bank, ‘gives’ the Commonwealth an amount of money – say $100 million. The bond lasts for a set period of time, such as three years. Under the terms of the agreement, the Commonwealth agrees to pay a fixed amount of interest during that three year period, before giving the investor back the amount that was initially paid.

Commonwealth bonds look like debt. And, as of April 2023, Australia had issued $911 billion worth. That leads some people – like the Treasurer – to conclude that Australia has a debt of $911 billion.

$911 billion of debt sounds horrible! It sounds even worse when some economists divide it up and conclude that each of us has a personal share worth more than $34,000. Scary!

The thing is, bonds are only one part of the Government’s finances. Focusing on one item in a set of accounts gives you the wrong picture. It would be like my wife and I concluding that, because there is $5,000 outstanding on our credit card, the family is burdened with debt. $5,000 on a credit card sounds like we have debt. But actually, we don’t. We use credit cards for convenience. There is always more in our savings account than we ‘owe’ on a card. We can pay the ‘debt’ off whenever we want. This means our credit card is not really a debt.

Australia’s Commonwealth bonds are like that. They exist for administrative convenience. And, just like my family credit card, the country can ‘pay them  off’ whenever we want. That is exactly what Australia did between 2020 and 2022, when the Reserve Bank of Australia (RBA) bought around $300 billion worth of Commonwealth bonds from investors to whom the bonds had been issued. That meant that the Commonwealth Government now had to pay interest to the RBA, before paying the RBA $3 billion when the bonds expire.

The RBA bought the bonds using new money created for just that purpose. It did not raise taxes. It did not sell other assets. It simply created money. The RBA can do that. Any time it wants.

The purchased bonds are now shown as assets on the RBA’s balance sheet.  The RBA is wholly owned by the Commonwealth. This means that, since these purchases were made, one part of the Commonwealth Government owes another part $300 billion. An entity can’t owe money to itself. In any true sense, this $300 billion of ‘debt’ no longer exists. The RBA basically created new money and cancelled it. And, as this example shows, the RBA could do the same with the rest of the outstanding bonds too, if it wants. At any time, ‘our RBA’ can create new money and use it to cancel bonds.

Most of the time, the RBA chooses not do so, because using bonds is administratively useful for us as a country. Much like using a credit card is administratively useful for my family. But if you can cancel a debt with a few keystrokes and the creation of new money, it is not really a debt.

Great news, this. For my family, it means we can buy our kids what they need. It means the same – but on a somewhat grander scale – for the country. So, don’t let the politicians tell you we can’t afford stuff “because of the $1 trillion debt.” It’s not true. If we need something – such as the NDIS – we can afford it.