How did it happen and what do we have to show for it?

The energised crowd was clapping loudly.

It was November 2007 and Kevin Rudd was making his pitch to the nation’s voters to elect him prime minister in a fortnight’s time.

He would not, he promised the Labor faithful at the Brisbane Convention Centre, repeat John Howard’s “irresponsible spending spree” contained in the Coalition’s campaign launch made just a few days earlier.

“Today I am saying loud and clear that this sort of reckless spending must stop!” he declared.

The crowd’s clapping was replaced by loud cheers.

It was a defining moment of an election that ended John Howard’s 11-year reign as prime minister.

But a year after Rudd’s address, he and treasurer Wayne Swan were battling the biggest financial crisis since the Great Depression. Spending restraint effectively died as the world came face-to-face with a disaster that reverberated through the global economy for another decade.

Government debt – which was just $54 billion when Howard left office, the lowest since 1990 and the smallest share of GDP since World War I – would grow $50 billion in 2008-09.

It marked the start of the long march that Treasurer Jim Chalmers, in his May 12 budget, will reveal will reach $1 trillion early in the new financial year.

It prompts two linked questions: how did we accrue $1 trillion in debts, and what have we got to show for it?

The long debt march

Rudd and Swan ran into the global financial crisis, which both forced up spending – more than $50 billion alone in stimulus-related measures – and reduced tax revenues.

Government revenue fell for two consecutive years – the first time since the 1930s.

While Australia was just one of three countries to avoid a recession, the economy slowed. The hit to tax collections and the increase in expenses such as unemployment benefits was around $100 billion within two years.

A little over a decade later, gross government debt had climbed to $542 billion under Scott Morrison and his treasurer Josh Frydenberg.

Then the world was gripped by the COVID pandemic. Gross debt climbed by $350 billion in three years. In 2019-20 alone, it jumped by a record $142 billion.

Again, tax receipts fell (by $17 billion) but the drop was not as severe as the 2008-10 period. This time, the ramp-up in spending did the most damage to the budget bottom line.

Programs such as JobKeeper and the huge expense of providing health services to protect Australians from a deadly new virus meant government spending soared by $176 billion in just two years. That spending was financed largely by debt.

Independent economist and keen budget watcher Chris Richardson said the financial crisis and pandemic were the key drivers of the explosion in debt.

But over time, state and federal governments have made increasingly expensive decisions on everything from new train lines to health services while running budget deficits.

“One trillion sounds bad, but then look around to see how the economy would have been without it. You may not have inner-city metro rail lines, may not have much of a health service or less in the way of aged care,” Richardson said.

“At any one point in time, state and federal governments have to make a decision on spending money either for today or for tomorrow. Over the years, they’ve increasingly decided to focus on today, at the cost of tomorrow.”

One sharp critic of the situation is Robert Carling, a senior fellow at the right-leaning Centre for Independent Studies.

“Sadly, there’s not a lot to show for $1 trillion in debt,” he said.

Carling agrees the two big crises since 2006 have played a part, saying that an increase in overall debt was inevitable.

“But if you believe in the budget being a macroeconomic stabilisation tool, then you have deficits but you also run surpluses in better economic times,” he said.

“There have only been three budget surplus years since 2006-07. So this is a structural problem, not a cyclical one.”

According to Carling, the increase in spending on services such as the NDIS, aged care, education and childcare have been the biggest factors in the run-up in debt.

Tax revenue as a share of the economy has varied little, he said, dismissing some criticism that tax cuts had contributed to the $1 trillion debt pile.

All the extra spending and debt, while providing more services, had come at a steep macroeconomic cost to the country.

“The steady accumulation of debt and deficits has meant higher interest rates and an exchange rate than would otherwise have been,” he said.

The interest bill coming for all taxpayers

As Carling notes, the NDIS is a huge weight on the budget. Spending on people with disabilities – which includes the NDIS and income support for those with disabilities – has climbed almost 600 per cent since 2007.

Some of that is due to the federal government taking over spending that used to be done by the states and territories.

Expenditure on non-government schools has also soared, up almost 260 per cent. Hospital spending is up 240 per cent.

There are long-forgotten decisions that have fed into the current situation. Joe Hockey borrowed $9 billion in early 2014 to give to the Reserve Bank – an institution that can print its own money – to help repair its bottom line, which had been damaged by the financial crisis.

There was no thought of repeating that policy during COVID when the RBA suffered a record-breaking $36.7 billion loss in 2021-22.

But the single largest cost increase is due solely to the run-up in debt.

The interest bill on government debt is expected to reach a record $29.4 billion in 2026-27, a near-eightfold increase on 2006-07. Taxpayers will, within two years, spend more on interest than on helping the states run the nation’s hospitals.

This cost is growing so quickly due to the size of government debt and the sharp increase in global interest rates. During the depths of the pandemic, the interest rate on a 10-year government bond slumped to less than 0.6 per cent.

Over the past week, the 10-year rate climbed over 5 per cent.

What’s changed since 2006?

The ultra-low debt level left by the Howard government was due to three key factors.

Spending restraint, and generally favourable economic conditions, had improved the budget bottom line since John Howard took office in 1996.

But the early 2000s mining boom, considered by the Reserve Bank to be the largest commodity boom since the 1850s gold rushes, flooded the government’s coffers with hundreds of billions in extra cash.

Howard privatised Telstra, raising more than $45 billion, which it used for various programs and to pay down government debt.

Perhaps more importantly, Howard and Costello left office before the demographic tidal wave that was the mass retirement of baby boomers from 2010 onwards.

In 2006-07, the age pension – the second-largest budget expense – cost federal taxpayers $24.4 billion. In the coming financial year, it will cost about $68 billion.

The 189 per cent increase is one of the largest within the budget.

Since 2006-07, taxpayers have spent more than $935 billion financially supporting older Australians. Total budget expenditure over the same period is around $10.3 trillion.

Not only do older Australians need income support. As they age, they need increased care.

That was highlighted by the 2018-2021 royal commission into aged care that revealed a system that needed a huge funding injection.

It’s an issue that both the Morrison and now the Albanese governments have been forced to confront. Spending on aged care has more than doubled since those low-debt days.

The aged care royal commission is just one of four that have forced governments to increase spending in particular areas.

The inquiries into violence and abuse against people with disabilities, into institutional child sexual abuse and into the treatment of veterans all prompted expensive responses.

Dealing with the backlog of claims for assistance by veterans is costing taxpayers an additional $13 billion alone.

EY Australia chief economist Cherelle Murphy said while government revenue had increased by about 0.6 per cent of GDP over the past 20 years, government spending had jumped by 2.4 per cent of GDP.

While spending had gone up, the government’s collection of assets had also increased. Everything from the NBN to new roads and railways meant the increase in net debt – which takes assets into account – was much smaller than in gross debt.

Murphy notes while the quantity of government debt is a significant issue, so too is the quality of spending.

“These benefits have stretched beyond what we understand to be traditional welfare. It means households can consume more, and for many, it has meant an improvement to their standard of living,” she said.

“Much additional government spending is needed and has created improved standards of living beyond what the productivity numbers tell us. But ensuring value for taxpayer money is critical to ensure there is less waste and debt levels aren’t higher than needed.”

The rise of the megaproject

Value for money has been a particular issue when it comes to government infrastructure since 2007.

During the global financial crisis, the Rudd government sank cash into projects with the twin aims of providing economic stimulus while improving the nation’s productive capacity. Examples include Melbourne’s regional rail link ($3.2 billion) and the Hunter expressway ($1.5 billion) in NSW.

Both continue to deliver benefits to their respective communities. But these, and others, were not finished until well after the crisis. The rail link, which added almost 50 kilometres of rail through Melbourne’s western suburbs, was not completed until 2015.

Into the 2010s, state and federal governments started rolling out “megaprojects”, with both levels of government often sinking cash into the same works.

These include the $31 billion inland rail link between Brisbane and Melbourne that is currently under construction. It was expected to cost $4.7 billion.

The North-East Link currently being built across Melbourne’s northern suburbs was first costed at $16 billion. It is now tipped to cost more than $26 billion.

Brisbane’s cross-river rail was approved in 2017 with a price tag of $5.4 billion with trains running by 2024. It is not expected to be operational until 2029 at a cost of $19 billion.

State-only financed megaprojects have suffered huge blowouts. Sydneysiders adore their new metro, ignoring its $9 billion cost overrun.

The run-up in infrastructure spending is partly due to the federal and state governments not investing enough during the late 1990s and early 2000s. A catch-up was necessary and the projects either will or should improve our major cities.

Taking on debt to finance long-lived infrastructure makes economic sense.

But if debt is just used to cover annual costs, then it becomes much harder to justify.

Independent economist Saul Eslake – who noted that defence spending and the bipartisan deal to placate angry West Australians over their share of GST had also added to the nation’s debt issues – said many of the decisions taken by governments since 2006 were justifiable.

But carrying so much debt will ultimately cost future taxpayers.

“Successive governments have been unwilling to ask Australians to pay for these new or expanded services, or for unavoidable increases in existing ones,” he said.

“Instead, it’s been ‘put on the tab’. Hence, the resulting increase in debt.”

Federal debt is not the only issue

If the thought of $1 trillion in debt is troubling, don’t look at the levels of debt being carried by the states and territories.

Their combined debt level is forecast to climb from $270 billion in 2019 to $820 billion by 2028.

Analysis by S&P Global shows that infrastructure spending by the states and territories has climbed from $52 billion in 2020 to almost $100 billion in 2025.

S&P senior analyst Anthony Walker warns state government level spending, most of which will be supported by debt, is unlikely to drop.

“It is common practice for politicians to withhold announcements of key capital projects until closer to elections. Further, governments have struggled to contain the cost of major projects, particularly rail and roads, which mean the cost of delivering these projects are usually well above original budgets,” he said.

Despite all of this debt, Australia is a low-debt nation. American government debt, for instance, will later this month cross the $US39 trillion ($54 trillion) mark with this year’s budget deficit an eye-watering $US2.4 trillion ($3.5 trillion).

Japan’s debt is 2.5 times the size of its economy. Canada’s debt load has reached 111 per cent of GDP.

Australia’s debt level, even at $1 trillion, is around 34 per cent of GDP and rates among the lowest in the world, which is awash in government debt that last year reached $US111 trillion ($155 trillion).

At the start of the century, governments were carrying less than $US20 trillion in debt. The two crises that did so much damage to Australia’s bottom line infected the world.

It will be future taxpayers, here and overseas, who will have to pay the interest bill on that debt while finding a way to bring it down.

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