Borrowing costs

Debt will jump $12 billion on rising borrowing costs

“Gross debt as a percentage of GDP as of June 30, 2026 would be 0.5 percentage points higher.”

The size of the Australian economy will be around $2.5 trillion, so an increase in the debt-to-GDP ratio of 0.5% would equate to over $12 trillion on top of the current debt forecast of $1.169 trillion. dollars.

Rising bond yields ahead of the budget meant the multi-billion dollar interest bill on Australia’s $1 trillion debt was already expected to jump nearly 50% to $26.3 billion from budget estimates at four years.

Damien McColough, head of rates strategy at Westpac, said yields of around 3% could be near their peak, but the peak was unlikely to be reached as long as the rate hike cycle of the Reserve Bank of Australia was not current.

Financial markets tip the RBA cash rate 0.1% to start rising in June. The rate is then expected to hit 2% by December and 2.69% a year from now, although economists expect the actual pace to be much slower.

And while a cash rate rising faster and further than expected would generally lead to reduced economic activity, PEFO said recent moves have not materially changed the economic outlook.

The Coalition’s self-imposed tax cap of 23.9% of GDP is not expected to be reached before 2031-32; the analysis takes into account the massive third-stage tax cuts that are expected to take effect in 2024.

Spending as a share of GDP remains higher than taxes and will continue to do so for a decade. Total payments are expected to fall from 27.2% of GDP in 2022-23 to 26.3% by 2025-26 before leveling off.

As expected, the PEFO does not make any significant revisions to key economic forecasts such as GDP, unemployment or wage growth from the budget.

Deficits are still projected for the next 10 years, but they will drop from 3.5% of GDP this year to 0.7% of GDP by 2032-33.

Since the March budget, the government has announced additional spending of $714 million over the four-year forecast, mostly to fund additional infrastructure projects, community development grants and to expand the Royal Commission on Defense and the suicide of veterans.

The extra spending was offset by $894 million in savings and other variations that slightly improved the budget result.

The PEFO risk statement notes a new $1.25 billion loan from Export Finance Australia to Iluka Resources to support the establishment of Australia’s first integrated rare earths refinery in Western Australia.

Financial support for Victoria to host the 2026 Commonwealth Games has not yet been budgeted.