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The true state of Queensland debt

Queensland’s debt: is it sky high, or under control? An economist shows what you need to know to judge for yourself. AAP/Dan Peled

The true state of Queensland debt

Queensland’s debt: is it sky high, or under control? An economist shows what you need to know to judge for yourself. AAP/Dan Peled

How much debt is Queensland really in? How much of that debt can past Labor governments bear responsibility for, and has the current Liberal National government cut or added to it? And how does Queensland’s debt compare, both within Australia and up against other countries?

This is an article for anyone wanting to know the answers to those questions and more – including the many readers who requested an explanation on the state’s debt after my recent article on Queensland’s economy.

For those interested in the technicalities of where I got my data from, and why I chose to look at the ratio of debt to Gross State Product, that’s all explained in notes at the end of this article.

But for everyone else, let’s move straight to what the data shows.

How does Queensland’s debt compare?

Table 1 below reports the ratio of debt to Gross State Product (GSP) in percentage terms for Australian states and territories over the last 10 years.

As a reference, the bottom of the table also reports the ratio of debt to Gross Domestic Product (GDP) in selected countries of the world. That data refers to general government debt only, and it’s sourced from the International Monetary Fund’s World Economic Outlook.

Author provided

What’s clear from that table is that the debt-to-GSP ratio in Queensland has increased considerably since 2006-07, and that most of this increase occurred under Anna Bligh’s Labor governments.

And in comparison to other states, Queensland now has the highest debt-to-GSP ratio.

However, this ratio remains relatively low in comparison to other G20 countries, including the Australian Commonwealth.

The ratio is also significantly lower than 90%, which some previous studies have identified as the level above which long-term growth is reduced. (You can read more in these 2010 and 2012 papers from Reinhart and Rogoff.)

But not everyone agrees on that 90% threshold; other studies have failed to identify any threshold and conclude that there is no relationship between debt and growth.

Another important point is that the 90% threshold is estimated from cross-country data on national or federal debt. The threshold at state level might be lower than 90% – but no conclusive estimates are yet available in the literature.

In other words, working out how much debt Queensland has is the simple part; deciding whether that debt is too high, about right, or quite low, remains a much more subjective matter.

Is all debt bad?

So perhaps a simple comparison of debt ratios is not the best way to assess the extent of the problem.

In fact, debt is not always bad and the objective of fiscal policy cannot simply be the minimisation of debt levels.

That’s not a sentiment you’re likely to hear either Queensland Premier Campbell Newman or Labor leader Annastacia Palaszczuk express between now and Saturday’s polling day. Yet that is something we should all be able to agree on.

If a government borrows to finance investment and/or to help the economy overcome a bad cyclical contraction, then a certain level of debt is not just acceptable, it’s arguably desirable.

In the end, debt is a tool that governments should use to achieve fundamental goals like growth and welfare. The fact that in Queensland debt is higher than, say, New South Wales is not, in itself, enough to conclude that Queensland has a debt problem.

The more relevant question for us to consider is then whether the debt level is sustainable or not. And that means looking at whether or not the debt-to-GSP ratio is likely to climb too rapidly in future.

You can’t evaluate debt without growth

In this regard, three factors determine the evolution of the debt-to-GSP ratio: the interest paid on the existing stock of debt, the rate of GSP growth, and the primary balance (which is the budget balance after the government has made its interest payment).

If the primary balance is zero (that is, revenues are equal to expenditures after accounting for the interest payment), then debt is sustainable as long as the rate of growth is not smaller than the interest rate on debt.

When growth is higher than the interest rate, then the government can even run a limited primary deficit and debt would still be sustainable.

A numerical example with numbers that approximate the current situation of Queensland might help understand the importance of economic growth for the purpose of sustainability.

Given an initial debt-to- GSP ratio of 25% and a nominal interest rate of 5.5%, a nominal growth rate of 7.5% is enough to maintain the debt-to-GSP ratio, constant even with a primary deficit of 2%.

With inflation at, say 3%, a nominal growth of 7.5% is equal to a real growth rate of 4.5%, which incidentally is very close to the average annual real growth rate in Queensland over the period June 1991 to June 2012.

So, more than an issue of reducing the absolute level of borrowing, sustainability is a matter of economic growth. An economy that grows is an economy that can sustain its debt.

Where could Queensland debt end up?

Let’s consider a few different scenarios to show how much different government approaches would cut Queensland’s debt.

Suppose that economic and fiscal conditions – that is, the growth rate, interest rate and primary balance – in Queensland over the next 10 years were the same as it has been under the current LNP government. Where would debt be by 2023-24? The answer is 58% of GSP.

If we repeat the exercise using the economic and fiscal conditions that occurred under the first of the two Bligh governments, then the answer would be 49%. With the conditions of the second Bligh’s government, the debt-to-GSP ratio would be higher, at 62%.

A government that was able to eliminate the primary deficit, but delivered the same rate of growth as the Newman government, would still produce a debt-to-GSP ratio of 51% by 2023-24.

The chart below shows the projected debt trajectories under all those different scenarios, starting from the current level of debt.

Author provided, Author provided

Bligh I – meaning the first term of the Bligh Labor government – was characterised by a higher primary deficit and interest rate than Newman, but the growth rate was also significantly higher. It is indeed this higher growth rate that in the simulation moderates the increase in the debt-to-GSP ratio.

In fact, the chart shows that in terms of stabilising the debt-to-GSP ratio it is better to have a limited primary deficit and grow fast than to have zero primary deficit and grow slowly.

This does not mean that the Queensland government (or any other government) should permanently run a deficit. Quite the contrary: the best way to avoid a debt problem is to alternate deficits in time of recession with surpluses in time of expansion.

However, it does mean that in the pursuit of debt stabilisation, a government should not make choices that cause sharp fiscal restrictions when the economic outlook is fragile or that compromise the state’s long-term growth potential.

Technical notes

To measure debt levels, I primarily used data from the Australian Bureau of Statistics (ABS), 55120.

The latest release of this data was in 2014 and the figures are reported up until fiscal year 2012-13. For Queensland (and a few other states), the data for 2009-10 and 2010-11 are not reported. For these years, I referred to the Mid-Fiscal Year Review (various years). I also used those Mid-Fiscal Year Reviews to extend the data to 2013-14.

The aggregate I considered was the “Borrowing” of the Non-Financial Public Sector, which includes the General Government and Non-Financial Public Corporations.

Then I scaled debt data to Gross State Product (GSP). In some analyses, debt is scaled to a variable like tax revenues, but this is not entirely appropriate as borrowing is a stock measure, while tax revenues is a flow measure. Moreover, Gross State Product is the scaling factor commonly adopted in the academic and professional discussion on debt.

Read more of The Conversation’s Queensland election 2015 coverage.