Fisher Investments Australia® Reviews Sovereign Debt Risks Down Under

Will post-World War II highs in public spending and budget backsliding tarnish Australia’s sterling credit? Some suggest so. But when Fisher Investments Australia reviews the situation, we find it cheerier than many appreciate.

After winning a House of Representatives majority in May’s election, many expect Prime Minister Anthony Albanese and his Labor party to deliver on campaign promises—e.g., tax and student debt cuts—whilst spending more on Medicare, childcare and housing. Now, Albanese will still have to navigate legislation through the Senate, where he won’t have a majority. Yet some still fear this may mean a rising tide of red ink, big deficits and ballooning debt looms, potentially hamstringing growth in time.

Thankfully, when Fisher Investments Australia reviews the country’s current debt situation, we find little to substantiate those concerns. Australian government debt as a percentage of GDP—a popular way to scale national debt’s size—is around 35% currently, considerably higher than 2007’s 6%.[i] But this is down from 2020’s 44% pandemic-era peak and, taking a longer view, less than half its 100%+ levels coming out of World War II. Nor is the present level high by global standards. Excluding intragovernmental holdings (which are both assets and liabilities, cancelling out), America’s debt is nearly 100% of GDP.[ii] Britain’s is similar.[iii]

Fisher Investments Australia’s review of financial circumstances Down Under suggests Australia’s debt isn’t likely to become problematic any time soon. Though many worry about soaring debt relative to GDP, that isn’t sovereign bond investors—national governments’ creditors—primary concern. What do they care about most? Getting repaid with interest.

Comparing debt levels to GDP doesn’t really speak to that. One, it is an apples-to-oranges comparison. National debt is a “stock” or “level” measure, meaning it counts all outstanding debt a country has accumulated over time. But GDP is a “flow” or “rate” measure, which the government tallies in an effort to track economic activity—essentially aggregating the value of monetary transactions for new goods and services within a given period (typically quarterly). Although faster or slower GDP growth (or outright contraction) may signal general economic health, there is no set debt level that is inherently good or bad for GDP, in Fisher Investments Australia’s view.

Consider Japan. The country has a debt-to-GDP ratio of 206%, yet 10-year Japanese government bond yields are sitting at 1.5%, suggesting low credit risk—Japan’s government can borrow pretty easily, at lower rates than much of the rest of the world.[iv] In comparison, Turkey has a seemingly small 26% debt-to-GDP level—yet 32% long-term interest rates.[v] Why the difference? Rampant inflation, currency devaluation and political instability plaguing the latter versus the former, to name a few reasons. Debt size relative to GDP may be a variable investors consider, but it seems far from the only one.

Another factor: Governments don’t pay their lenders in GDP—they pay them with taxes and other revenue sources. So when Fisher Investments Australia reviews bond buyers’ relevant metrics to assess nations’ creditworthiness, it isn’t debt-to-GDP metrics they focus on mainly, but governments’ ability to make debt payments: Does incoming revenue cover interest costs—and by how much?

According to the government’s latest numbers, Australia has no trouble paying. Interest payments were 2.3% of tax revenues for fiscal year 2024 – 2025.[vi] That is much, much lower than other major developed economies, including America (18% last year), the UK and Canada (each around 8% in 2023).[vii] Looking longer term, Australian interest payments have been hovering around 4% of annual revenue for two decades—put another way, government receipts usually cover debt service about 25 times over—and that was when interest costs were a higher share of revenue! That is even with a higher debt-to-GDP ratio than the single-digit days. If much higher debt service costs weren’t a problem in the past, like the 1990s when revenue covered interest payments by only seven times, then we doubt it will become a problem any time soon today. Markets aren’t oblivious to this—Australia’s 4.5% 10-year bond yield is well below its 7.4% average since 1969.[viii]

Many fret deeper deficits and mounting government debt threatens Australian finances and economic growth. But look under the bonnet and Fisher Investments Australia’s review shows reality is far less dire than perceived. Knowing debt isn’t as onerous as headlines hint helps you cut through the noise. And proper perspective, focusing on fundamental market drivers versus false fears, is critical to your investment success.