Although the Federal Government's outstanding debt securities are currently around $231 billion, the State Governments have also been doing a good job of borrowing. Total borrowing for Governments peaked at $442 billion, but with the new surplus, outstanding debt actually dropped by $10 billion in April 2012, as seen in the graph below.
The Australian economy relies on increased borrowing to fuel an expanding economy. With Government debt, credit growth hardly fell below an annual 6% growth. This demonstrates how the stimulus package was essential in stopping the economy falling further into recession. The Government is now expecting private credit growth alone to rise to over 6% per year, in order to fill the gap resulting from not wanting to increase outstanding debt to fund a deficit.
Over the past five years the ratio of Government debt compared to private sector credit has increased, further highlighting the economy's dependence on Government spending.
So the State and Federal Government's determined austerity to remove spending from the economy is starting to bite. The presumption is that the private sector will expand and start to borrow. Given the recent 10% correction in the world's various stockmarkets (as a verdict on the direction of economic activity), this scenario continues to look less likely. For reasons that are not particularly good, the RBA will need to continue to drop interest rates. Yesterday the five-year Government bond rate touched a low of 1.89%, with the Government announcing falling interest rates as a triumph of economic management. The opposite is most likely true as the non-mining economy falls further into recession.
Currently the US is waiting for QE3, and Europe is waiting for Germany to agree to issuing common Euro bonds as a form of fiscal and monetary union. Similiarly, Australia will need to wait for our Government to change it's mind.