Welcome to the decade of budget deficits

The Australian government's debt has risen to an alarming level, with total debt crossing the $1 trillion mark for the first time. New debt issuances worth $13 billion and $4 billion are set to push the total above this threshold, only to fall back below it the following day upon maturity of $6 billion worth of debt. The Parliamentary Budget Office predicts that federal and state debt will continue to climb in the coming years, leading to a substantial increase in interest costs.

By 2029-30, interest costs are expected to surge from 4.1% of government revenue in 2024-25 to 6.2%. This trend could diminish fiscal flexibility, as a larger portion of revenue will be allocated to servicing debt. By the end of the decade, combined state and territory debt is projected to exceed $771 billion, while total federal and state debt will reach $2 trillion. Western Australia currently has the lowest forecast for net debt per capita, while the ACT, Victoria, and the Commonwealth have the highest.

A research note by Institute of Public Affairs chief economist Adam Creighton highlights that New South Wales, Victoria, Queensland, and South Australia face a significant increase in their annual interest bills due to an estimated $226.5 billion of debt needing refinancing. This debt was taken out during the pandemic at a rate of less than 3%, but will likely be rolled over at around 5.5%, resulting in an additional $8.1 billion in interest payments annually.

By 2030, net debt per capita is projected to more than quadruple to $18,383, an increase even when accounting for inflation. Combined state net debt is expected to surpass annual state revenue for the first time, with the weighted average coupon on the outstanding debt currently at around 2%. Interest costs would rise by approximately $2.7 billion for New South Wales and Victoria, $2 billion for Queensland, and $600 million for South Australia, equating to a 25% increase in some cases.

These calculations likely underestimate the eventual increase in interest costs, as they assume no additional net borrowing after 2030. Overall, Australia's governments have been living beyond their means, and a prolonged period of austerity may be required to reduce debt levels and restore fiscal sustainability.