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But over the medium term, the government will be forced to refinance more than $1 trillion of debt at higher rates than previously assumed.
Treasurer Jim Chalmers has warned higher debt interest costs loom than the Coalition government assumed in the budget.
Treasury Secretary Steven Kennedy said last week, “since budget there has been a significant increase in the interest rate on government debt”.
“The impact will build over time as a rise in yields only affects new issuance, including as debt on issue matures and needs to be refinanced.
“This would especially be the case if growth and interest rate dynamics become less favourable over time.”
He suggested controlling spending, closing tax breaks and boosting productivity to repair the budget faster.
The previous fiscal strategy of purely relying on the economy to grow faster than bond yields to reduce the debt-to-GDP ratio was no longer the “prudent” course, he said.
Macroeconomics Advisory and former Treasury economist Stephen Anthony said history showed that over the last 50 years it was “not necessarily true that nominal growth rates outstrip interest rates over time”.
Interest rates were higher than nominal economic growth in the 1980s, 1990s and 2000s, according to his analysis.
Mr Anthony warned combined Commonwealth and state net debt could almost double to 55 per cent of GDP by the early 2040s.
“This debt build-up leaves little scope for funding major structural spending fixes.
“Nor does it provide any buffer against other national emergencies and global risks.”
Global stocks falling
Stocks around the world have fallen heavily as global borrowing costs have jumped in reaction to surging inflation.
Goldman Sachs tipped the Fed to raise interest rates 0.75 of a percentage point this week and by another 0.75 of a percentage point in July, after US inflation hit 8.6 per cent last week.
National Australia Bank senior interest rate strategist Ken Crompton said bond yields would probably peak this year, but could ease off if the US economy suffered a hard landing.
The bond market is pricing in a US recession after the yield curve inverted – which means the projected interest rate falls, not rises, over time because of expectations the economy will shrink.
Treasury’s PEFO in April revealed government debt could end up more than $12 billion higher than forecast by 2025-26, if government borrowing costs remained around 3 per cent, instead of the 2.3 per cent assumed.
The 10-year bond yield surged even higher on Tuesday to briefly go above 4 per cent.
If sustained, the gross debt bill could rise by more than $20 billion over the next four years or about 1 per cent of GDP.
Government interest expenses would rise by more than $2 billion a year.
While that would be relatively modest in a budget projected to rack up $1.2 trillion debt, the higher interest repayments would rise over time as government bonds expire and are refinanced at higher bond yields.
The AOFM will annually refinance about $70 billion to $80 billion of maturing Treasury bonds over the next few years, about half of which the Reserve Bank of Australia owns and will need to be soaked up by private investors.
The AOFM will also have to borrow for future government budget deficits forecast at about $80 billion a year.
The independent Parliamentary Budget Office last September said the Commonwealth’s fiscal position can remain sustainable over the longer term even if the government continues to run modest deficits.
“Future governments will need to act to ensure sustainability, but if they act consistently and early, they do not need to consolidate more rapidly than after previous downturns,” the PBO said.
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