Opinion: Australia’s march towards $1 trillion in gross debt has prompted plenty of hand-wringing, but a closer look tells a far less alarming story, argues economist Stephen Koukoulas.
Every Friday, the Australian Office of Financial Management publishes the total value of Australian government securities on issue.
On Friday 17 July 2026, that figure was just shy of a trillion dollars at $977.7 billion. This is the Federal Government’s gross debt, comprising government bonds, indexed bonds and Treasury Notes.
When the government spends more than it receives in revenue, it generally borrows to cover the shortfall. Larger and more persistent budget deficits therefore tend to produce higher government debt.
Our march towards the trillion-dollar debt mark has prompted concern. Recently, the International Monetary Fund (IMF)warned that governments, including Australia’s, had not done enough to improve their budget positions during the relatively calm years following the pandemic.
We should not dismiss that warning. But we should not judge Australia’s debt by the headline dollar figure alone. The more meaningful questions are how large the debt is relative to the economy, what assets sit against it and how Australia’s net debt – rather than gross debt – compares with similar countries.
Focus on the net debt
Industrialised countries use similar structures of issuing and managing government finances. This means it’s relatively easy to compare government debt levels in absolute terms and, more importantly, as a proportion of annual GDP.
These sorts of comparisons are useful for determining the financial health and credit rating of each government. The in turn is an important factor in assessing the risk of the securities, or bonds, issued by governments.
As a reliable rule of thumb, the larger the level of government debt, the greater the risk for investors. As a result, when assessing government debt, a focus on net debt is pertinent.
Governments hold assets against the gross debt on issue. The Australian government also holds financial assets, including investments through the Future Fund. The government takes these assets into consideration when calculating net debt.
Taking account of these assets, net government debt in Australia is $537.4 billion at the end of May. This is approximately 19 per cent of annual GDP.
How do we compare to other countries?
Compared with similar countries, this level of net government debt in Australia is extremely low. Based on current policy settings and the economic outlook presented in the May 2026 budget, the government expects net debt to remain low at around 20 per cent of GDP.
The IMF presents data on net government debt, including forecasts, which cover the next four years for all major countries. According to recent IMF estimates, over the timeframe out to 2029, net government debt in Germany is projected to rise from 50 per cent at present to 60 per cent of GDP, while net debt in the United Kingdom is expected to be broadly steady just under 100 per cent of annual GDP.
The situation in the United States is more problematic. The misguided fiscal policies of the Trump administration will prompt net debt to rise from an already inflated 100 per cent of GDP to just under 120 per cent of GDP in 2029.
Net government debt in Japan, conversely, is forecast to fall marginally from 130 per cent of GDP to around 125 per cent of GDP at the end of the forecast horizon.
It is clear from these comparisons that the government debt position in Australia is extremely low and, as a result, an issue that is of little worry or concern to credit rating agencies and investors.
Barring some extreme external economic convulsions that have a material adverse impact on the economy, such as a global financial crisis or health pandemic, the current budget settings point to government debt remaining moderate.
The Australian government remains committed to fiscal restraint. It is keeping new spending growth in check and setting taxes to support small budget deficits, at or below 1 per cent of GDP. There may even be a budget surplus if the economy performs more strongly than expected.
By comparison, the US is expected to run annual budget deficits of around 6 per cent of GDP. There is concern about this deficit and debt position being sustainable.
Where this could lead us
These risks could come to a head if the deficit position deteriorates further as the geopolitical ructions in the Middle East and the cost to the US budget continue to rise. Or if the US administration cuts taxes without any offsetting fiscal prudence.
For now, the US and other nations with large levels of government debt have little trouble funding their borrowing requirements. While there is decent economic growth, this is likely to remain the case.
The problems with the level of government debt become apparent and then acute when the borrowing requirements are so large that it leads to problems attracting the investors needed to cover the borrowing requirement.
This is when extreme economic problems emerge which inevitably spill over to the banking sector and the broader economy. These pressures often compromise central bank monetary policy and make recessions inevitable.
On this level, Australia has been the beneficiary of many years of a well-functioning government sector that – outside of global economic shocks – has been adjusting its policy settings to keep debt levels low.
Comparisons of debt levels with the rest of the world confirm this to be the case.
Stephen Koukoulas is Managing Director of Market Economics. He has 30 years’ experience as an economist in government, banking, financial markets and policy formulation. Stephen was senior economic advisor to prime minister Julia Gillard, has worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
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