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Should you fear the federal government’s $1 trillion debt bomb?

Treasurer Josh Frydenberg is throwing everything and the kitchen sink at reflating the economy. And the FY21 federal budget papers shows he’s leaving a record $1 trillion debt hole behind.
The post Should you fear the federal government’s $1 trillion debt bomb? appeared first on Motley Fool Australia. –

Mortgage

Treasurer Josh Frydenberg is throwing everything and the kitchen sink at reflating the economy. And the FY21 federal budget papers shows he’s leaving a record $1 trillion debt hole behind.

He says it’s worth it to get Australia out of the COVID-19, even if it means that net debt will peak at just under that obscene level in FY24. On a gross basis, debt is tipped to peak at $1.7 trillion something over the next 10 years!

Should you be worried? And how will this impact on your ASX share portfolio?

After all, those horrifying projections may reflect the best-case scenario given Treasury’s prediction is based on some optimistic assumptions.

Is debt a four-letter word?

We have often been told that high levels of debt can lead us to financial ruin. What’s bad for the goose must surely cook the gander.

But before you hit the panic button, it’s important to note that government debt is not the same as household debt.

Lenders are happy to give governments a lot more leeway as the risk of a default by a developed nation is extremely low.

Key difference between government and consumer debt

While the federal government can adjust taxes and spending (similar to how you or I can change our income and expenses), it also the Reserve Bank of Australia (RBA) to act as a guarantor.

The central bank can print money to buy government bonds, and that gives Treasurer Josh Frydenberg a lot of room to borrow.

Mind you, there’s a limit to how much money the RBA prints, but it’s a very big limit. International investors have a high regard for Australia sovereigns and we are only one of 11 countries with the highest AAA credit rating from the three major ratings agencies.

This means our government debt is more highly rated (seen as safer) than the United States.

Why debt may not be so bad

This brings me to the second point. The US has three times more debt than Australia and has long had a large debt load, most of which was accumulated during the GFC.

But this hasn’t hampered its economy, neither has it dethroned the US as the global investment benchmark.

It helps that the US dollar is regarded as the world’s reserve currency, but another big reason why a heavy debt load isn’t an issue is because investors can’t get enough of it.

Australia may not quite be in the same category despite our stronger credit rating, but I have little doubt that investors are happy to keep lending us cash for a very extended period.

The upside from having more debt

This may sound contradictory, but having more debt may actually be in our country’s interest! When ex-Treasurer Peter Costello repaid all of the Howard Government’s debt, it effectively shut down our bond market.

Bond fund managers were left distressed as international investors went away. Then the GFC hit, and the Australian government had to restart the bond market.

That not only took more time, but some investors were reluctant to return due to worries that the bond market would again disappear when the good times returned.

But with the growing pool of bonds that have to be issued under the current 10-year plan, credit investors can at least take heart that they will have a reasonably large and liquid pool to play in.

Foolish takeaway

As long as there’s confidence that Australia can repay its loans, this love affair can go on into perpetuity.

With the amount of excess cash slushing around in the global financial market and record low interest rates, there has never been a better time for the Morrison government to borrow big to reflate our depressed economy.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Should you fear the federal government’s $1 trillion debt bomb? appeared first on Motley Fool Australia.

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