Who do states owe money to?

As Australia’s state and territory governments prepare to hand over their annual budgets in May and June, the political heat around public debt and deficit will increase.

The COVID-19 pandemic and accompanying economic crisis has seen Australia’s public debt reach unprecedented levels as money is borrowed and spent on the biggest economic stimulus the country has seen.

The borrowing-to-spend approach to the approval and financial support of the Reserve Bank of Australia but as the economy rebuilds, the question of the mountain of debt that is piling up – and how to pay it back – will become more urgent.

How did states get into debt? How much do they owe? And to whom do states owe all this money?

Credit:Illustration: Jamie Brown

How did we get into debt?

Government revenue sources simply cannot cover the 327 billion state dollars and federal COVID-19 response and recovery funds are expected to be spent by 2024.

Nationally, borrowing to pay for all these expenses and cover income deficits is due to blow to $ 1.3 trillion in over the next three years, the bulk – $ 952 billion – being owed by the Commonwealth.

But across Australia, prime ministers and their treasurers are thinking big with their strategies to pull their states out of the COVID-19 economic crisis, pumping unprecedented amounts of borrowed money into their local economies.

States and territories, according to a analysis by the Parliamentary Budget Office, will owe $ 371 billion within three years.

If all goes according to plan, the states’ share of all Australian government debt will be 29% by 2024, more than double the long-term average of 13%.

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Victoria, which has the economy hardest hit by COVID shutdowns, leads the debt burden. Prime Minister Daniel Andrews and his money man, Treasurer Tim Pallas, plan to increase the state’s net borrowing to about $ 155 billion by mid-2024 with the goal of creating 200,000 jobs by next year and 400,000 by 2025.

The huge state stimulus effort, typical of the approach used by governments across the country, rolls out tax breaks for businesses, wage subsidies for women and young workers and a record “big construction” transport infrastructure, housing and schools.

Victoria’s net debt is expected to reach $ 87 billion this fiscal year to reach $ 155 billion by 2024. Its closest borrowing rival, New South Wales, predicts net debt of $ 53.2 billion this year rising to $ 104 billion in three years. Next in line is Queensland is expected to owe $ 25.5 billion, rising to $ 51 billion, followed by Western Australia with $ 24.5 billion, reaching $ 28 billion in 2024.

South australia is expected to reach $ 15 billion in shanks this year, rising to $ 25.5 billion, and the Northern Territory is expected to owe $ 8.6 billion, rising to $ 12 billion, the ACT net debt of $ 4.6 billion this year is expected to reach nearly $ 8 billion in 2024 and Tasmania is expected to have a net debt of $ 1.9 billion this year, rising to $ 4.4 billion.

But all that state and territory debt is eclipsed by federal government borrowing in response to the pandemic with Commonwealth net debt this year the figure was $ 703 billion, rising to $ 952 billion by 2024.

What is the difference between debt and deficit?

Victoria recorded her first budget deficit in nearly 30 years in July 2020, with the state $ 7.5 billion in the red, as the coronavirus hit state economies hard, and by November the deficit figure had climbed to $ 23 billion dollars.

A deficit is the difference between what the government expects to receive in taxes, grants and other revenues by the end of the fiscal year in June – in this case, roughly $ 67 billion – and what it thinks to spend; in this case, nearly $ 90 billion.

All other states and territories except Western Australia which is keeping its budget out of the water thanks to soaring resource prices and a windfall in GST revenue will run budget deficits this fiscal year, but none as important as Victoria’s.

Governments can finance their deficits in three ways.

Either they cut government spending and services, which reduces their spending; or they increase taxes, thereby increasing their income.

Raising new taxes and fees or raising the rate of existing taxes is not much of an option in abyss-staring state economies, leaving only the third way. Governments are filling these budget gaps; they borrow.

When a government borrows to finance a deficit, it reports those funds as “net debt”; the sum that the State owes to its creditors, less the value of its financial assets.

So who do we owe all this money to?

In Victoria, the Andrews Labor government controversy Belt and Road Offer with China has its political opponents and many in the community wonder if the prime minister and treasurer approached Beijing for a bailout – and, if so, what the People’s Republic might want in return.

But it doesn’t work like that. Australian governments do not accept loans the way households and businesses do. Instead, they issue bonds.

A government bond, also known as a “debt obligation,” guarantees its buyer regular government interest payments over the life of the bond, which can be five, 10, 20 years or more. even more. No collateral is offered, as the value of the bond is invested in the long-term stream of government interest payments.

Government bonds are a low-risk, low-return investment option that is very attractive to banks and other institutions that need to show regulators a certain amount of assets that are safer than the house – known as capital. level 1 – as collateral against bankruptcy if some of their most dangerous properties deteriorate.

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Once the bond is issued, by a the state treasury company via an auction process, it can then be traded over and over again in a global ‘secondary market’, meaning that it is impossible for a state government to control who holds the state’s public debt. And while companies keep an eye on who buys and sells, its bond register is not publicly available.

Treasury Corporation of Victoria chief executive Bill Whitford provided clues to the state Parliament’s Public Accounts and Estimates Committee in November. “Foreign investors probably represent between 10 and 15 percent of the overall stake,” Whitford told MPs on the panel.

“The largest group of investor holdings are Australian banks. So the big four banks [Commonwealth, Westpac, ANZ and NAB] will hold about 40 percent.

“Australia’s smallest deposit-taking institutions [banks] will hold approximately 9%. “

Victoria’s creditor profile is typical of all other states, which means that most of their debt is owed to Australian commercial banks and other financial institutions.

The other buyers of Australian government bonds are foreign sovereign wealth funds and China has several. So while it’s entirely possible that Victoria, any other state, or even the federal government owes money to interest associated with the Chinese government, it’s not like we’ve mortgaged the country in Beijing. .

There is also a new player in town: the Reserve Bank of Australia, which bought up by about $ 100 billion federal and state government bonds and embarked on another buying program to increase its holdings to $ 200 billion, split between 80 and 20 federal and state securities.

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The spending frenzy, known as quantitative easing, has a dual purpose. First, it helps states and the Commonwealth pump money into the economy – in an effort that has been equated with printing money without actually producing new banknotes – and it keeps interest rates on everything. this public debt by increasing the demand for bonds.

the the latest figures show NSW owed the Reserve Bank just under $ 4.7 billion at the end of January, Victoria owed about $ 5.2 billion to the RBA, Queensland owed $ 6.4 billion, WA had borrowed 3 , $ 75 billion and the federal government owed nearly $ 130 billion.

The interest rate is fixed for the life of the bond and right now the rates are very low with states borrowing their money from around 0.1% for a three-year bond and 1.15% for a 10-year bond.

So these low rates mean that if the total net debt of Australian states increases more than tenfold – from $ 35 billion to $ 371 billion between 2019 and 2024 – these governments’ interest bills are only expected to rise by 7. to $ 11 billion over the same period. .

Rates are also locked in for the life of the security. So state treasurers don’t have to worry about the interest bills on money they’ve already borrowed suddenly going up. The concern for states like Victoria, NSW and Queensland, which plan to do a lot of new borrowing in the coming years, is where the interest rates go on its future borrowing.

What happens if we don’t refund it?

It is a distant prospect. the enabling legislation of the Public Treasury corporations offer irrefutable guarantees that investors in government bonds will be paid.

Just to be sure, rating agency Moody’s Investor Services, while the downgrading of its advice on Victoria’s solvency in February, told clients that the federal government would almost certainly step in if a state found itself in genuine conflict with “a high likelihood of extraordinary support from the Australian government in times of need.”

But would the big banks and international investors who loaned us money have a potential claim on a state’s public assets in the event of default? No. States do not provide assets as collateral for loans.

The takeaway is, don’t worry about all that debt, says the Governor of the Reserve Bank, Philip Lowe – and he puts $ 200 billion of his bank’s money where it is by lending it to the states and the Commonwealth.

The governor told the national Standing Committee on the Economy of Parliament in December, that the state’s record debt levels were manageable at record borrowing costs, and that he was more concerned that governments continued to spend to keep their citizens in employment than with l opinion of rating agencies.

“What I want to see is strong public finances in Australia, and I think we have and will continue to have that,” Lowe told MPs.

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