Jim Chalmers’ October budget is expected to show an increase in interest costs of more than $120 billion over the coming decade.

Jim Chalmers’ October budget is expected to show an increase in interest costs of more than $120 billion over the coming decade.Credit:Alex Ellinghausen

When Josh Frydenberg released his version of the 2022-23 budget in March,the interest rate on 10-year government bonds was around 2.3 per cent. Now,due to global inflation fears,they are about 3.8 per cent.

The 1.5 percentage point increase is affecting a record level of gross government debt which last week was at $884.6 billion. Another $4.1 billion,including $800 million that will not be repaid until 2023,is to be sold to investors this week.

It is translating into much higher interest payments. In the 2025-26 financial year,the national interest bill is likely to be more than $33 billion — a $7 billion jump on what was forecast in the March budget.

The increase alone is more than what is spent on the nation’s air force in a single year. At $33 billion,a record,the federal government will spend more on interest than on child care subsidies,support to carers and public schools combined.

Higher interest rates will add more than $16 billion to government coffers over the budget forward estimates.

Over the next decade,total interest costs are likely to be $120 billion more than what had been forecast in March.

Total interest payments on government debt is now the fastest growing area of government spending,exceeding other cost pressure areas such as the NDIS and defence.

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Chalmers,who is expected to confirm government debt will surpass $1 trillion within two years,said the increase in interest rates was hitting the budget bottom line harder every year.

“This is just another growing pressure that we’ve got to manage in the lead-up to this budget and in future budgets as well,” he said.

“The October budget is the first step,not the last step,in our work on long-term budget repair. It’s the beginning,not the end,of the conversation we have to have as a country about these challenges,about choices we need to make,and about what’s affordable and what’s fair.”

The speed at which interest rates have climbed has caught governments around the world by surprise.

In a two-month period last year,the Australian government sold more than $24 billion worth of debt to investors at a negative interest rate.

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The last negative interest rate debt was sold on October 21 last year,when $1 billion worth of short-term debt was sold at an interest rate of minus 0.0069 per cent.

On September 15 this year,the government sold $500 million in short-term debt (to be repaid in February next year) at an interest rate just over 3 per cent.

Stephen Koukoulas,an independent economist who was former economics advisor to former prime minister Julia Gillard,said the rise in interest rates was a wake-up call for all governments about the true cost of carrying high levels of debt.

“This is why the level of government debt is important — this is a lot of money that can’t be spent on services or infrastructure,” he said.

“The budget will need to look at ways of improving the bottom line to get back into surplus. If they can do that then the RBA may not have to lift interest rates as high.”

Earlier this month,Reserve Bank governor Philip Lowe said this term’s parliament would have to look at higher taxes,spending cuts and productivity-enhancing economic reforms to help bring the budget back into surplus.

Fears are growing that hikes in interest rates by central banks will drive many nations into recession.

Fears are growing that hikes in interest rates by central banks will drive many nations into recession.Credit:Peter Rae

Chalmers,who describes next month’s budget as a “bread and butter” one,will this week release the final result for the 2021-22 budget. That is expected to show a $50 billion improvement due to higher commodity prices,delays in spending and the stronger jobs market.

But there is now a risk of recession across Europe and the United States as central banks lift interest rates to kill inflation pressures.

Coalition finance spokeswoman Jane Hume said her party would not support raising taxes.

Hume,who said the Coalition did not have policies as it was in opposition,argued the government should cut some of its election promises and reduce spending.

“This budget should be all about making sure that fiscal policy works in line with monetary policy because otherwise you’ve got your two policies working against each other,” she told ABC Television.

“I would like to see a very cautious budget and I would like to see Labor re-prioritise their spending commitments.”

Cut through the noise of federal politics with news,views and expert analysis from Jacqueline Maley.Subscribers can sign up to our weekly Inside Politics newsletter here.

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