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  • Writer's pictureFlow Australia

Government debt now fastest-growing spending pressure

The federal government's debt bill is set to balloon as higher interest rates push up the cost of borrowing.

Interest payments have eclipsed the National Disability Insurance Scheme as the fastest-growing area of Commonwealth spending. 

Higher interest rates are making debt more expensive to service and are likely to cost the federal budget tens of billion extra in the coming years.

The higher cost of borrowing is expected to add up to $80 billion more in interest payments over the next 11 years.

Releasing the data ahead of the mid-year budget update on Wednesday, Treasurer Jim Chalmers said higher interest rates were not only hurting households but federal finances as well.

"We're getting government debt on a better trajectory, but that debt is becoming more expensive to service," Dr Chalmers said.

The budget predicted NDIS spending was expected to increase at an average rate of 10.4 per cent.

Banking revenue upgrades to the budget avoided $145 billion in interest payments over the 12 years, he said.

With interest rates moving higher, Treasury has updated its assumption for the cost of new borrowing to 4.7 per cent, up from 3.4 per cent in the 2023/24 budget.

Interest payments are expected to grow by an average of 14.4 per cent over the next decade, faster than the NDIS, which is projected to grow at a rate of 13.8 per cent.

At the May budget, the NDIS was expected to increase at an average rate of 10.4 per cent, faster than the 8.8 per cent average growth predicted for interest payments.

Hospitals, aged care and defence are the other three fast-growing areas of spending.

Government spending on hospitals, aged care and defence is accelerating.

Despite these spending pressures, the mid-year update is expected to reveal a healthier budget bottom line than what was detailed back in May. 

The federal treasurer has played down the prospect of a second surplus, but the $13.9 billion deficit initially projected for 2023/24 financial year is likely to be smaller.


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