Rising interest rates to cost taxpayers an extra $13 billion

Over that same period, the government is expected to spend $85.9 billion on family assistance payments and $80.9 billion on payments to people with a disability.

The lift in interest rates has caught all governments by surprise over the past four months.

The federal government sold $800 million in debt at an interest rate of 3.41 per cent last week that will not be repaid until November 2032. In August last year, the same line of debt was sold with an interest rate of 1.2 per cent, and in March it was sold at 2.3 per cent.

Chalmers said that by 2032-33, the government could be spending an extra $18 billion a year in interest.

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The treasurer, who is due to give an update on the economy and budget when parliament resumes on July 26, will hand down a fresh 2022-23 budget in October.

“The October budget will be all about responsible cost-of-living relief, implementing our economic plan and redirecting money wasted by our predecessors to more productive investments,” he said.

Deloitte Access Economics, in its latest business outlook, is also expecting the cost of government borrowing to lift.

Three months ago, it was tipping the key 10-year bond interest rate to average 2.2 per cent this financial year and next. It is now forecasting them to average 3.6 per cent in 2022-2 and 3.3 per cent in 2023-24.

The forecaster is expecting the economy to expand by 3 per cent this financial year, inflation to average 5.7 per cent and employment to grow by another 2.6 per cent after 3.1 per cent in the just completed 2021-22. It expects the jobs market to grow thanks to a lift in net migration, which is tipped to grow from 78,940 in 2021-22 to 171,130 this year.

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Deloitte partner Stephen Smith said the biggest risks remained around how the Reserve Bank responded to the lift in inflation.

“Setting interest rates in the current environment is more than a little tricky,” he said.

“The post-pandemic high is fading quickly as house prices begin to turn downward and consumer confidence continues to slip. Add in the darkening global outlook and it becomes quickly apparent that the risk of raising interest rates too much needs to be balanced against the risk of not raising them enough.”

Deloitte expects the tight jobs market to generate a lift in wages growth, forecasting the wage price index to lift to 3.2 per cent this year and 3.5 per cent in 2023-24.

Smith downplayed concerns that the lift in wages growth would feed directly into a spike in inflation.

“The potential for a wage-price spiral is limited – the labour market looks very different today than it did in the 1970s and ’80s, with less co-ordinated wage setting and a less deliberate link between wage growth and inflation,” he said.

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