Economics in Australia is frequently reduced to debates around government debt. Claims and counterclaims about profligacy and borrowings overlook several issues.

First, the current scale of the debt is unprecedented outside of wars. At the end of 2021, global debt was US$295tn – 350% of everything the world produces in a year, compared with 282% in 2008. The major increase is in government debt, which has reached a record 99% of global output. US, eurozone and Japanese government debt is now at 103%, 98% and 257% of output respectively.

Australia’s federal debt is forecast to peak at less than 40% of output by 2025, well below the average for advanced countries. But the number is deceptive.

It excludes borrowings by state and local governments, which over the same period will rise to around 20% of output, but could be greater depending on state infrastructure spending. It disregards contingent liabilities, such as New South Wales’ controversial Transport Asset Holding Entity, which holds public transport assets helping improve the state’s finances. It ignores exposure to private-public partnerships used to finance infrastructure, which governments may have to support to ensure essential services.

It overlooks implicit government guarantees for Australia’s “too big to fail” banking system, which is heavily exposed to households carrying debt of around 130% of output, among the world’s highest.

Australia’s debt levels are also high considering a narrowly based economy, a limited tax base and overreliance on one trading partner – China.

Second, rather than financing investments which would generate future income, much of Australia’s government debt has been used to finance recurrent expenditure, transfers and tax cuts – and, during Covid-19 lockdowns, to replace lost earnings.

Third, excessive government borrowing limits economic flexibility. Higher rates would raise the commonwealth and state’s interest payments (already forecast to reach 1.4% of output over the next three years), reducing funds for other outlays. Rising debt levels reduce the capacity to deal with crises such as the pandemic and natural disasters.

Fourth, individuals and businesses must satisfy lenders as to their income and repayment ability. In contrast, governments increasingly rely on central bank money creation to meet obligations. The Reserve Bank currently holds around a third of all government debt (over $300bn), mostly purchased since 2020. But fiscal deterioration and currency debasement risk loss of confidence among foreign investors who hold roughly two-thirds of federal government bonds, constraining access to overseas capital.

Fifth, the options for managing the run-up in debt are limited.

“Budget repair” (raising taxes or cutting expenditure) risks weakening already diminishing growth prospects. With economic activity requiring ever higher amounts of new debt, reining in borrowings could setting off a negative spiral damaging activity and government budgets.

Other alternatives are equally unappealing. Inflation, effectively covert taxation, can help deleverage by boosting revenues and reducing purchasing power, but would hurt low income groups, exacerbate inequality and raise social tensions. Devaluations reduce the value of Australian government debt held by foreigners but would affect the cost of imports or the ability to borrow overseas. Default or debt restructuring, effectively national bankruptcy or former prime minister Paul Keating’s “banana republic”, is unthinkable.

The historical experience of managing excessive debt is not encouraging.

Between 1914 and 1939, the first world war and the Great Depression damaged public finances. Countries making up nearly half of global output defaulted or were forced to enter arrangements with creditors resulting in severe social and economic costs.

After the second world war, some countries defaulted or experienced hyperinflation. Others resorted to capital controls, loan rationing and mandatory investment in government debt at below inflation rates. Strong growth driven by pent-up demand and post-war reconstruction, conditions not applicable today, helped control borrowing levels. While the now abandoned gold standard restricted policy choices then, substantial debt reduction still remains difficult.

The problem is fundamentally behavioural.

Voters love the lower taxes and state-provided goods and services funded by government borrowing rather than taxes. Over time, more and more borrowing with diminishing returns must be incurred just to maintain the status quo. Unfortunately, true prosperity cannot be built on excessive cheap credit.

Since the 2008 global financial crisis, the world has perversely tried to solve the problems of debt with more borrowing. As philosopher Denis Diderot observed: “we swallow greedily any lie that flatters us, but we sip only little by little at a truth we find bitter.”

Australian government debt has increased the most of any major economy this century, more than doubling over two decades. The nation faces perhaps another 10 years of budget deficits.

While government borrowing is not yet unsustainable or irretrievable, an informed and considered discussion about the trajectory would not be amiss, preferably before that point is reached.

• Satyajit Das is author of A Banquet of Consequences – Reloaded (March 2021) and Fortune’s Fool: Australia’s Choices (forthcoming March 2022)