Australian Government debt to surpass $999b this week, as Commonwealth interest payments expected to surge

Australia’s gross government debt is set to sail past $999 billion this week as bond market expectations of higher inflation pushes up Commonwealth interest payments, a former Treasury economist fears.

The amount the Commonwealth owes is growing at a faster rate than Treasury predicted before Christmas with the $1 trillion milestone likely to be reached in March.

Treasury’s Mid-Year Economic and Fiscal Outlook released in December predicted gross debt would reach $993b by the end of 2025-26.

This marked a downgrade from the pre-election March Budget forecast of $1.022tr this financial year.

But that optimism is looking misplaced with the Australian Office of Financial Management revealing that Federal Government securities on issue had reached $995.5b as of February 20.

By Thursday, gross government debt is expected to hit surpass $999b but not quite reach $1tr as maturing government debt outweighs new debt, quantified in terms of new government bonds announced on a weekly basis.

Treasury is expecting interest costs to keep growing at an annual pace of 9.5 per cent in coming years, with gross government debt climbing by $28.5b in the year ended January 31.

Three-year Australian government bond yields this week also reached a 15-year high of 4.3 per cent, which former Treasury economist Warren Hogan said would mean even higher government interest payments should the Reserve Bank of Australia fail to control inflation.

Bond yields, or the annual payments to investors, rise when governments have to compete harder for bond market investors.

“If the RBA gets it wrong on inflation, and it becomes a real issue, then long-term interest rates will start to rise as investors price in higher inflation or just abandon the market altogether, the so-called bond vigilantes,” the EQ Economics managing director told The Nightly.

“The whole thing becomes very unsustainable very quickly. We’re not on a sustainable path as a whole country in terms of the economic strategy and we raise the risk this $1 trillion debt level is going to be a much bigger burden on our society much more quickly than anyone thought.”

AMP chief economist Shane Oliver said the Government was relying on extra income tax revenue to finance the 8.2 per cent annual increase in Commonwealth spending to cover cost blowouts in the NDIS, childcare subsidies and aged care.

“It’s going up at a rapid rate,” he told The Nightly. “I suspect that spending has been ramping up again.”

The Opposition’s new finance frontbencher Claire Chandler, 35, said younger Australians from her millennial generation would be paying the price for Prime Minister Anthony Albanese having spending growth running well ahead of inflation.

“If spending growth keeps running ahead of inflation, exactly what the Albanese Government keeps doing, it’ll be my generation and Australians younger than me paying the interest bill on that debt,” she told The Nightly.

“That’s why the focus should be on value for money, targeted programs, and sensible fiscal decisions that are sustainable over time.

“The Labor government is not disciplined in its spending. Unfunded discretionary spending adds to debt and interest costs, which Australians ultimately pay for either through higher taxes over time or less room for future priorities.”

Government payments for this financial year are forecast to grow by 8.2 per cent to $786.6b, comprising 26.9 per cent of gross domestic product.

This would be the highest share of the economy since 1986 outside of COVID.

The Australian Chamber of Commerce and Industry is calling for government spending as a share of GDP to fall to less than 25 per cent of GDP, something last achieved in 2022-23 during Labor’s first financial year in power which covered the end of the Coalition’s period in office.

This employer group argued this would “prevent spending blowouts and consequent tax increases” in its pre-Budget submission.

Higher government spending also means the private sector competes for scarce resources, which Business Council of Australia chief executive Bran Black argued led to higher inflation.

“We know that when government spending grows too quickly or crowds out the private sector, it can drive up costs for all Australians,” he told The Nightly.

“We’re facing significant spending pressures, particularly in health, ageing and defence. That means every dollar needs to be spent efficiently, keeping taxes as low as possible while still delivering quality services and a strong safety net.

“This is about protecting living standards. If spending runs too high, we risk locking in higher inflation, higher taxes, or both in the years ahead.”