The difference between government debt and personal debt can be compared in terms of a government deficit being like an overdraft; a shortfall between income and expenditure in a particular period. Public (national) debt is akin to a mortgage and is a much larger debt which needs to be paid off (in principle…) over years. The difference between government and personal finance is that when government finances aren’t too rosy, they can simply bundle the deficit into the public debt – a situation not open to individuals. Governments do not need to have plans in hand to pay down the national debt – the only requirement is that the financial community should be convinced that they can continue to make the interest payments on the debt.
The Global Financial Crisis and, in particular, the European Sovereign Debt Crisis, served to bring the issue of debt and deficit into the political arena as never before. Many nations had to increase their “current account” deficits to pay for initiatives to soften the worst effects of the crisis and are engaging in austerity measures to get deficits back under control.
The Australian government has just announced plans to shrink its deficit by 40% over the next year, reducing it from AUD50 billion to AUD30 billion. This will involve hardships and is projected to cost the jobs of 16500 public servants across the country. Sale of state held assets such as the Royal Australian Mint and Australian Hearing, a company that manufactures auditory aids are also being considered. The plans mean that funding for welfare, public service broadcasting and foreign aid will be cut back and some government bodies will be downsized.
However, infrastructure expansion plans are also on the table, such as a new airport for Sydney, worth AUD11 billion, and the creation of a new medical research facility, worth AUD20 billion. The aim of the new projects is to diversify the economy away from reliance on the mining sector which has boomed as demand from China has soared, but remains a hostage to global demand, particularly Chinese. Australia’s GDP is set to increase by 2.5% this year.