Debt, deficit and Australia’s credit rating: what it all means

Debt, deficit and Australia's credit rating

While Australia weathered the Global Financial Crisis (GFC) relatively well compared to most other nations, we have been left with higher net national debt and budget deficits consistently running in the order of -2.0 percent to -4.0 percent of nominal GDP.

Partner, Chief Economist

KPMG Australia


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Countless suggestions have been put forward regarding how to rectify this. Some argue it should be fixed by reducing government spending, others suggest an increase in personal and corporate taxes, while many believe that both spending cuts and tax increases should be employed.

KPMG carried out modelling involving five simulations where Australia's debt-to-GDP ratio was targeted to achieve a reduction of 5 percent over the current trajectory between 2016-2020. The simulation models were:

  1. Reduce government consumption only.
  2. Cut government spending and increase corporate and household tax rates so that spending cuts contribute 85 percent and tax hikes 15 percent to the reduction program.
  3. Increase both corporate tax and household tax but in their current ratios of Australia’s tax base (33 percent and 67 percent).
  4. Increase household taxes only.
  5. Cut government expenditure and increase corporate and household tax rates so that both actions contribute 50/50 to debt reduction.

We also engage our KPMG-MACRO model to simulate various policy options targeted at reducing the nation’s debt-to-GDP to consider the impact on the Australian economy into the medium term.

Australia’s Debt Deficit – September 2016

Brendan Rynne, KPMG's Chief Economist, explores what a drop from a AAA to AA rating could mean for Australia's interest payments in future.

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