rising interest rates increase the cost of public debt
But in the medium term, the government will be forced to refinance more than $1 trillion of debt at higher than expected rates.
Treasurer Jim Chalmers warned that debt interest costs would be higher than the coalition government had forecast in the budget.
Treasury Secretary Steven Kennedy said last week, “Since the budget, there has been a significant increase in the interest rate on the public debt.”
“The impact will build over time, as a rise in yields only affects new issuance, particularly as debt issued matures and needs to be refinanced.
“This would be particularly the case if the dynamics of growth and interest rates become less favorable over time.”
He suggested controlling spending, scrapping tax breaks and boosting productivity to fix the budget faster.
The previous fiscal strategy of only relying on the economy to grow faster than bond yields to reduce the debt-to-GDP ratio was no longer the “prudent” path, he said.
Macroeconomics adviser and former Treasury economist Stephen Anthony said history has shown that over the past 50 years it was “not necessarily true that nominal growth rates outpace interest rates over time”.
Interest rates were above nominal economic growth in the 1980s, 1990s and 2000s, according to his analysis.
Mr Anthony has warned that the combined net debt of the Commonwealth and the States could almost double to 55% of GDP by the start of the 2040s.
“This accumulation of debt leaves little room to fund major structural spending fixes.
“Nor does it provide a buffer against other national emergencies and global risks.”
Global stocks fall
Stocks around the world fell sharply as global borrowing costs surged in response to soaring inflation.
Goldman Sachs has advised the Fed to raise interest rates by 0.75 percentage points this week and another 0.75 percentage points in July, after US inflation hit 8.6% in the week last.
National Australia Bank’s senior interest rate strategist Ken Crompton said bond yields are likely to peak this year, but could fall if the US economy suffers a hard landing.
The bond market is pricing in a recession in the United States after the yield curve inverts, meaning the projected interest rate is falling, not rising, over time due to forecasts of a shrinking economy .
The Treasury PEFO in April revealed that public debt could end up exceeding forecasts by more than $12 billion by 2025-26, if government borrowing costs remain around 3%, instead of the 2 .3% assumed.
The yield on 10-year bonds rose further on Tuesday to briefly exceed 4%.
If sustained, the gross debt bill could rise by more than $20 billion over the next four years, or about 1% of GDP.
Government interest expenditure would increase by more than $2 billion per year.
While this is relatively modest in a budget expected to rack up $1.2 trillion in debt, higher interest payments would increase over time as government bonds expire and are refinanced at higher bond yields. students.
The AOFM will refinance about $70 billion to $80 billion in maturing Treasury bonds each year over the next few years, about half of which is held by the Reserve Bank of Australia and will need to be absorbed by private investors.
The AOFM will also have to borrow for future government budget deficits projected at about $80 billion a year.
The Independent Parliamentary Budget Office said last September that the Commonwealth’s fiscal position could remain sustainable over the long term, even as the government continued to run modest deficits.
“Future governments will need to act to ensure sustainability, but if they act consistently and early, they need not consolidate faster than after previous downturns,” the PBO said.