Bond rates and budget balances

The spread of interest rates on 10-year bonds in the top 20 nations that account for more than three-quarters of world gross domestic product is very wide, ranging from 1.2 per cent in Japan to 9.6 per cent in Turkey. The bond rates chart shows this diversity.

With Japan’s public debt approaching 250 per cent of GDP, the interest cost on its bonds consumes about 10 per cent of its annual tax take.

But if Japan was paying the average rate for the top 20 (4.3 per cent), then the sacrifice would be more than one-third of its taxes: a frightening prospect.

Given that Japan is raising much of the debt domestically helps but in the process that deprives household savers and pensioners of a decent return for their thrift.

The US isn’t a lot more generous to its bond buyers either, paying 2.3 per cent, but most of that money comes directly or indirectly from outside its borders.

Turkey, India, Russia and Mexico are on the upper rungs of the ladder.

Australia, however, sits slightly below the average at 4.1 per cent. This is being aided, to some extent, by the return to household thrift that became evident in the years following the global financial crisis and which enables Australia to fund more of its annual investment program with a lower dependence on foreign borrowings.

This is a particularly important turnaround for a nation that, compared with all the 34 rich nations in the Organisation for Economic Co-operation and Development (OECD) group, is investing the highest share of its economy in capital expenditure. This has been occasioned to a large extent by our mining boom.

Future bond rates will be partially determined by government budget balances. The picture in 2012, as shown on the second chart, is not a pretty one, with only South Korea running a surplus among the top 20 nations. Japan’s position looks particularly precarious unless it can overcome its pattern of deficit spending that has become rife over so many years.

The position of the US and Britain is only mitigated by their lower public debt as a share of GDP compared with Japan, but those two nations – running deficits of more than 7½ per cent of GDP – can ill afford to keep those deficit levels for more than several years before getting their houses in order.

Again, Australia looks somewhat virtuous by comparison, and that is amplified by Treasurer Wayne Swan’s promise to have the federal budget balanced in the 2012-13 financial year.

Even if that were to happen a year later, Australia’ situation would still rate highly among the world’s advanced nations.

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