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The country could be in debt for $184 billion - should you be worried?

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Many Australian's are currently enjoying the benefits of the Governments COVID-19 stimulus measures, although there are just as many worrying about the debt we are creating as a nation and how we will survive this.

On Thursday, Treasurer Josh Fyrdenberg revealed that Australia's budget would blow out to $184.5 billion over the next year, making it the biggest deficit we have experienced since World War II and putting Australia further into debt. While increasing our national debt should be concerning to all Australian's, we also need to look at the bigger picture and put what is now happening into context.

In 2019, Australia's debt to GDP was 41.80%, and after Thursday's announcement, this will rise even further, but by how much is uncertain right now although expectations are that it will not be an alarming increase. In comparison, if we look at US debt, we see that the debt to GDP is currently sitting at a massive 132.57%. To see the US debt to GPD level like Australia is currently experiencing, you have to go back 60 years to the 1960's when the US debt to GPD ratio was 52.65%.

national debt deficit

Much of the growth in debt in Australia has occurred over the last decade because in 2000, at the height of the GFC bull run, the debt to GPD level was just 9.7%. When you compare that to today's level, you can start to understand why so many Australians are currently concerned.

Stimulus packages during the GFC also saw debt levels in the US increase significantly but unlike the US, Australia has done an excellent job over the past four years in curbing its debt to GDP level, as it has been in the low 40% range since 2016 and, until COVID-19, was set to fall away.

So, should we be concerned?

Like so many others, I am concerned but I am not alarmed by our debt levels for two reasons.

The first is that a nation's debt is very different to household debt because unlike individuals who have set periods as to when the debt must be repaid, the nation's debt has no set time limits. Secondly, our debt to GPD level is currently quite acceptable and, as a nation, we are much better placed than most other countries to not only handle this increased debt but also thrive over the next few years.

So what are the best and worst performing sectors this week?

Information Technology has been the big mover up more than 4%, while Consumer Discretionary is up almost 2% with the Energy sector not far behind. The worst performing sectors include Communication Services, which is down more than 1% while Utilities and Consumer Staples are down just under 1%.

Looking at the ASX top 100 stocks, the best performers are Oz Minerals and QBE, both of which are up more than 9% so far this week. Tabcorp is also up more than 8% with IOOF, Downer EDI and Flight Centre all up more than 7%. The worst performers include Brambles and Alumina, as both are down more than 4% followed by Aurizon Holdings and Telstra, which are both down more than 3% while CSR, Coles and Orora are down more than 2%.

What's next for the Australian share market

This week the All Ordinaries Index moved up to its highest level in six weeks and, more importantly, looks set to close at its highest level since early March. That said, the move up is cautious rather than confident, which means investors should continue to exercise patience rather than jump into the market for fear of missing out (FOMO). In fact, this fear has seen many make unwise decisions over the past month or so because if the market does turn down, as expected, many inexperienced investors will be caught out.

While I believe there is time for our market to trade up to around 6600 points, I still expect the market to peak sometime soon and for it to fall away. For weeks, our market has failed to trade above 6314 points set on June 9, and moving past this level in the coming week will indicate whether the target of 6600 points is achievable. If it fails to rise above 6314 points next week, means our market will begin to fall away soon into the next low.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.
Comments
Shaun Campbell
July 25, 2020 5.09pm

Hey Dale,

In your article you mention,

"In 2019, Australia's debt to GDP was 41.80%, and after Thursday's announcement, this will rise even further"

I read this after reading David Thornton's article, "There's no sugar-coating it: the next few years are looking grim", where he mentions,

"net debt is expected to be $488.2 billion, or 24.6% of GDP, at 30 June 2020 and increase to $677.1 billion, or 35.7% of GDP, by 30 June 2021".

Does your reference to 2019 mean as at 30 June 2019? Are you both referring to the same thing, because neither 24.6% nor 35.7% are higher than 41.8% so I am a bit confused as to what the real figures are.

Many thanks.

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