The debts run-up by profligate governments are about to cost us dearly

The first Budget of the Abbott Government sought to impose some restraint but its measures were blocked by the Senate so the trend of deficit spending just continued.  The 2019-20 Budget of the Morrison Government promised a return to surplus, but this evaporated when Covid struck.  The 2020-21 Commonwealth Budget (in response to Covid) indicated an expected underlying cash deficit in 2020-21 of $213.7 billion (11.0 per cent of GDP).

Between 2007-08 and 2020-21, Commonwealth debt increased from 4.7 to 42.5 per cent of GDP.  Commonwealth debt per capita increased over ten-fold, from $3,263 to $33,126 in real terms over the period.

Based on the forward estimates to 2023/24, general government (Commonwealth and States) gross debt is projected to balloon from $817 billion in June 2019 (42 per cent of GDP) to $1,755 billion in June 2024 (80 per cent of GDP).  Treasury is now forecasting at least a decade of deficits, with the underlying (Commonwealth) cash deficit assumed to be about $53bn in 10 years’ time.  Commonwealth Government debt will be $1.8 trillion in 2030-31, or 55 per cent of GDP.

The biggest issue with all this debt is that there is little tangible to show for it, and our financial system has lost much of its connection with the real economy.  Official rates of 0.1 per cent are clearly too low (and the RBA is promising to keep them there for roughly the next three years).

Combined with easy credit, low interest rates are creating a boom in asset prices.  There is currently a stampede of investors and home buyers seeking loans, that are bidding up the prices of property and equities.  Interest rates are already coming under market pressure.  Look at recent risesin bond rates in the US, increased interest in fixed interest loans, and tighter restrictionson home lending recently announced in New Zealand.

Eventual higher tax burdens, inflation, and at least some rise in interest rates are a near certainty.

In the UK, Chancellor Rishi Sunak is raising taxesto the highest level since the 1960s.  Mr Sunak announced that from 2023 corporation tax would rise from 19 to 25 per cent for the most profitable companies.  He also said that the basic rate and higher rate income tax thresholds would be frozen from next year, raising an additional £19bn.

While the timing of Australia's public spending binge was roughly right, Joe Biden’slandmark$1.9 trillionstimulus package in the US is a massive pork-barrel that comes too late, with the US economy already recovering strongly.  Elsewhere, those countries that were in financial difficulty before Covid, are now at increased risk of sovereign default.

In this country it has yet to be widely recognised that the middle classes will pay dearly for wasteful government spending.  This is because, given that half of Australia's families pay no net tax, those that do are responsible for repaying or servicing a disproportionate share of public debt.

In effect there is perhaps an average (hidden) $100,000 or so of public debt that typical middle class taxpayers will each have on their shoulders, most likely to be extracted by bracket creep, increased state taxes, and perhaps a higher rate of GST.  Savers will also be big losers, even though it is likely that interest rates will rise somewhat from current almost zero rates.  A prolonged period of negative real interest rates is still likely to persist in order to indulge debtor governments across the world.