Australian state & local governments have much higher levels of debt compared with their American counterparts. Partly, this may be a result of a greater propensity to run state-owned businesses in Australia, but it may also suggest that caution should be exercised when considering further borrowing at the state & local levels.
This article compares the debt levels of Australian and American state & local governments in 2017 (the latest available data). Key metrics of debt are analysed to investigate the respective fiscal health of American and Australian state governments.
In conducting such an analysis, it is important to justify the comparison between American and Australian state & local governments. Although the two nations abide by similar federal political structures, this does not mean that the respective governments share the same responsibilities and powers.
Perhaps the most crucial difference between the Australian and American federal systems is the division of service provision between local and state governments. American state governments have fewer responsibilities than Australian ones because of the more active role of local governments in the US. County, municipal and special district governments alleviate pressure from states to provide services such as general administration and maintenance, law enforcement, fire services, water supply, emergency services, and transportation. This, along with other factors, means that directly comparing the two nations’ state governments will portray the spending habits of Australian states in an excessively bad light. Additional differences between the two nations’ governments, which will be explored more deeply throughout the article, include varying political and social expectations, and balanced budget requirements.
There are also definitional differences between what American and Australian governments consider as “debt”. The main difficulty here was removing finance leases from the Australian debt categories, which were found in the respective governments’ Reports on State Finances, so that debts could be considered equivalently. It should also be noted that, so Australian data could be compared with the US data, the “total public sector” data for Australian states were used as opposed to the more traditional “non-financial public sector” data.
The debt-to-GSP ratio is a commonly used metric for analysing debt levels but its insightfulness is hotly debated. The rationale behind its usage follows on from the understanding of GSP as a complete gauge of economic capacity and that the amount of debt with regard to GSP serves as a measure of indebtedness relative to payback potential. If the debt-to-GSP metric is accepted, it is clear that Australian governments – especially Queensland, weighing in at around 26% – are high.
Another oft-used measure of relative indebtedness is the debt-to-revenue metric, which we consider in the next section.
Debt-to-revenue and debt-to-GSP are usually considered to be cut from the same cloth but analysing both in this scenario solidifies two main findings through corroboration; Victoria is leveraged relatively well compared to their economic capacity, but Queensland and WA are highly leveraged for their respective economic capacities when compared to their peers.
Perhaps this demonstrates a key difference between American and Australian state governments: the different political and social expectations between American and Australian state governments, which lead to varying degrees of politically necessary expenditures.
One could also argue that, fiscally, American states are equipped with greater means of obtaining revenue because they are able to impose income and sales taxes. Therefore, this metric could be unfairly skewed in favour of American states. However, Australian states, although legally prohibited from doing so, still receive tax payments from Government Owned Corporations (GOCs). Indeed, Australian State Governments receive “tax equivalent payments” from GOCs so those GOCs are not unfairly advantage relative to private enterprises which are not exempt from taxation.
Additionally, the balanced budget requirements of US state & local governments, apart from Vermont, probably contributes to the seemingly exemplary performance of American governments in this chart. A balanced budget means that American state & local governments are prohibited from spending more than they collect in revenue, a stipulation that would most likely mean lower debt, all else equal. Such a requirement may be good for debt but could encourage perverse fiscal policies – particularly in recessions, as reduced tax revenues would cause government spending to decline when it is arguably most needed. The five American states with over 100% debt-to-revenue can be explained by the fact that around half of American state and local governments abide by biennial budget timeframes.
Debt-per-capita is a common metric for analysing debt levels because it gives an indication of how much a government has borrowed to provide services for each of its constituents. Australian states are performing relatively well under this metric, but WA still appears to be quite high.
Interest-to-revenue is concerned with the cost of taking on debt with regard to currently existing revenue streams. Worryingly, SA and QLD are leading in this respect, paying around 4.6% of their total revenue toward interest costs. Furthermore, Australian states have a well-established position among the ten worst American state & local governments in this respect. These high interest costs imply that Australian states may be paying too high of a price for debt right now, considering the return that they are expecting in the future.
Perhaps the higher debt levels of Australian state governments are justified when their different political and fiscal responsibilities are taken into account. The data would be much more insightful if the general government and GOCs could be split, so we could be comfortable about comparing like with like. Having said that, given the data that are available to us, it is clear that Australian states – particularly Queensland, which places first or second across all but one of the covered metrics – are handling much higher levels of debt than their American counterparts.
This article was prepared by Ben Scott, Research Assistant, and Gene Tunny, Director, of Adept Economics. Please get in touch with any questions or comments to firstname.lastname@example.org.