Borrowing to Compete or Survive a Pandemic - New Directions in Australian Fiscal Federalism

This paper shows that Australian net debt by government sector in 2021-22 was at an all-time high, higher than that experienced during the previous GFC crisis. It provides empirical evidence the contribution of the states and territories to all Australian public debt accumulation is currently higher relative to any other point in the history of Aus- tralian federalism. The percentage increase of the states’ net public sector debt since 2011-12, has considerably outpaced the Commonwealth’s. The key question, therefore, is whether these increases in public debt represent a critical juncture in Australian Fiscal Federalism, or, if they are simply pandemic related driven? Australian fiscal ar- rangements make the states and territories extremely fiscally inflexible during times of crisis. The paper establishes that Australia indeed does have the necessary conditions to pressure increasing state indebtedness in the future. These conditions, however, have not been sufficient to produce high levels of subnational debt accumulation in Australia, relative to other more decentralized federations.