26 November 2020

Insights

The Debt Challenge

image courtesy of  'The Australian'

We are at or close to peak Government spending in Australia, spending that leaves record levels of Government debt across the country.

Below are the estimates of total Australian Government debt, as taken from recent budget tables. Queensland reports were delayed due to the state election but we can assume the net debt level will rise by approximately $20 billion. Total Government debt is estimated to reach ~AS1.4 trillion. This will create challenges for Governments at every level.

Total Government debt is forecast to rise to over A$1.3 trillion. Source SMH

Governments across the country have committed to productivity style reforms to alleviate the debt levels. While welcome, this is unlikely to be enough to pay down debt significantly.

As I have written previously, debt levels across the world are at all-time highs as Governments have spent aggressively to offset the pandemic.

This has cushioned economic impact but not slowed the spread of COVID-19, as daily cases and deaths continue to trend higher globally. Australia stands out amongst a small group of countries that have controlled the spread of COVID-19. This significant achievement has come with higher debt levels.

What are the implications of the significant increases in Government debt?

  1. Governments need debt financing costs to stay low. Higher longer-term bond yields are very unhelpful, but yields are demand and supply driven. Governments are on both sides of the balance sheet as supply is set to increase, which should push yields higher, everything else being equal … and central Banks are buying Government debt while maintaining a degree of independence. I wonder if a 12-year old child would agree with this definition of independence?

  2. Rates matter and Central Banks have explicitly or implicitly agreed to hold rates low for long periods. They are also actively suppressing bond yields via asset purchases.

  3. Over time, Government assets sales will have to increase. The fastest way to reduce debt is to sell an asset and use the receipts to pay down debt.

  4. Government services will have to be privatised, reduced or cut.

  5. Governments will have to prioritise which services they will continue to provide.

  6. Governments will look for ways to provide services at lower costs, working with the private sector where possible.

  7. Taxes will have to rise. In Australia focus will return to increases of the GST.

Global GDP growth is set to soar in 2021 with some forecasters predicting 6% global growth. Inflation will remain subdued and rates will stay low. This is all pushing asset prices higher today in anticipation of a stronger 2021.

Assets markets live year-to-year. Commentators focus on year-to-date and year-on-year returns, as everyone must mark to market annually for tax payments.

Sustainable investment return looks beyond the year-on-year, adding capability and productivity gains to create financial returns.

Sustainable investors can take advantage of the likely peak in Government expenditures by investing in private sector providers of services (service providers).

Beckon Capital actively invests in the SME sector, creating a pool of sustainable, investable assets.

Beckon Capital uses impact assessment to help these businesses grow and thrive. The Government cannot be relied upon to provide the same levels of assistance; it will actually become a drag on growth.

Sustainable businesses will be the driver of growth going forward.

David (Bushy) Nolan

Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)

image courtesy of  'The Australian'