Scott Murdoch | The Australian | January 20, 2012
Australia is one of only three developed nations to reduce its debt-to-GDP ratio as the global economy struggles under a growing amount of leverage and the ongoing European crisis.
A new report from the McKinsey Global Institute has found that government debt continues to rise in most major nations as authorities attempt to pump-prime their economies.
The study found Australia , along with the US and South Korea, had reduced its debt ratios since the start of the global financial crisis.
The majority of the deleveraging had occurred in the private sector as a result of the rush of equity recapitalisations early on in the downturn.
McKinsey says financial institutions reduced their leverage by 18 percentage points as the banks moved to reduce their exposure to risk and tightened lending criteria. The non-financial corporations cut debt levels by 12 percentage points.
However, some of the gains were offset by increased government expenditure, which raised public sector debt levels.
“(Australian) households have yet to start deleveraging,” the report says.
“Government debt, due to rising social expenditures and falling tax receipts, has increased by 11 percentage points since 2008.”
The report found that despite concerns the US economy was moving into the “second phase” of deleveraging.
“The US has reached more milestones (to reduce debt) than other nations and is closest to moving into the second growth phase of deleveraging,” McKinsey says. “In all deleveraging countries the challenge in the next few years will be to find the correct balance between the need to reduce debt and the need to revive GDP growth.”
The report showing Australia’s government debt levels have risen is likely to be seized upon by the opposition, which has criticised Labor for spending its way through the crisis.
Labor has vowed to return the budget to surplus by 2012-2013 by ordering major spending cuts.
The government’s Mid-Year Economic and Fiscal Outlook recently forecast the surplus would be just $1.5bn, which economists believe is under threat from domestic and international economic volatility. But Acting Treasurer Bill Shorten yesterday reaffirmed the target surplus.