Net debt and net worth

With the budget remaining in cash surplus in 2003-04 and the forward years, further reductions in net debt are expected. Net interest payments are also expected to fall over the forward estimates, reflecting lower net debt levels and the low interest rate environment.

Table 5 and Chart 1 provide a summary of Commonwealth general government net worth, net debt and net interest payments.

Table 5: Commonwealth general government net worth, net debt and
net interest payments

1. Net debt equals the sum of deposits held, advances received, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid, and investments, loans and placements.
2. Includes the impact of the further sale of Commonwealth shareholdings in Telstra.
3. Commonwealth cash interest payments less cash interest receipts. The 2005-06 estimates include the recognition in cash terms of the capital growth on inflation indexed bonds maturing in that year.

Chart 1: Commonwealth general government net debt and
net interest payments

Source: ABS Cat. No. 5501.0 and 5513.0, Commonwealth Final Budget Outcomes and Treasury estimates.

Australia's net debt is at low levels and is projected to fall over the forward estimates period. The level of Australia's net debt compares very favourably with other industrialised economies. The ratio of Australia's total general government net debt to GDP is among the lowest in the OECD, and is considerably lower than in Europe, Japan and the United States (see Statement 1).

While declining throughout the forward estimates period, the net debt estimates are higher than anticipated at MYEFO. This mainly reflects a deferral in further sales of the Commonwealth's shareholding in Telstra and the move to market valuation of net debt (see Box 1).

Having peaked at $8.4 billion in 1996-97, net interest payments are expected to decline to $3.4 billion in 2003-04, representing annual savings in interest payments of around $5 billion. This has freed up funds to deliver tax reductions and for spending on priority areas such as families, education and health.

Net worth is expected to improve from -$47.2 billion in 2002-03 to -$46.1 billion in 2006-07, mainly reflecting the cumulative surpluses in the forward estimates.

Box 1: Market valuation of net debt The Australian Bureau of Statistics (ABS) accrual Government Finance Statistics (GFS) framework requires that flows and stocks are valued at current market prices (or where these are not observable, a suitable proxy indicator). Previous budgets foreshadowed that the Commonwealth would align reporting with the ABS GFS treatment of debt as the accruals framework is bedded down. The Australian Office of Financial Management is introducing a new debt valuation system which allows the Commonwealth to more readily value publicly traded debt at market prices.   The market value of a debt instrument generally increases as market interest rates fall. This is because the interest coupon payments are relatively higher than the market rates currently available. Investors seek the instrument for higher returns, thus driving the price of bonds higher. As interest rates have fallen substantially over the last decade, reflecting the low inflation environment, the market value of Commonwealth net debt still on issue has been higher than its historic cost. As a result, valuing outstanding debt to market results in a higher value than historic cost (see Table 6).

Table 6: Market valuation of net debt

The revised valuation methodology has been applied from the 1999-2000 fiscal year, when accrual accounting was introduced and the ABS accrual GFS framework was adopted. This creates a disconformity in the net debt series as outcomes prior to 1999-2000 are based on historic cost, consistent with the applicable budgeting framework of the time.   The move to market valuation of net debt in the 2003-04 Budget is accompanied by a number of technical adjustments to the timing and recognition of interest flows to align the budget accounting treatment with the ABS GFS framework. Further information on these adjustments is reported in Statement 8.

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