Interest payments on Commonwealth debt could become the third-largest spending item in just 10 years, behind only health and income support for seniors, according to new research from free market think tank the Institute of Public Affairs. The interest payment on debt could consume 7.5% of the Commonwealth Budget and cost $64.1 billion by 2030-31.
“High and growing levels of government debt pose a tangible danger to our future prosperity. Our children and grandchildren will be paying off this debt, and their standard of living will be significantly reduced as a result,” said Cian Hussey, Research Fellow at the IPA.
“If interest rates rise slightly higher than expected, the annual interest bill on Australia’s massive debt will quickly cost more than the entire Age Pension if immediate action is not taken to reduce the national debt,” said Mr Hussey.
“The argument that current debt levels do not matter because interest rates are low is dishonest and misleading. Interest rates will almost certainly rise before we can begin to pay off the debt, which will mean a growing share of the Budget will be allocated to interest payments,” said Mr Hussey.
The report also found that the Budget could be returned to surplus by 2031-32 without any spending cuts or tax increases. To do so, average spending growth would need to be reduced from 5.1% to 4% per year after 2024-25.
“The government can return the Budget to surplus within a decade by reducing average spending growth to 4% per year after 2024-25. This means that, without any spending cuts or tax increases, the Budget can be brought back into the black,” said Mr Hussey.
The report, Selling Australia’s Future: Why government debt matters and how to return to surplus, authored by IPA Research Fellows Cian Hussey and Kurt Wallace, modelled the effect of different nominal GDP growth and interest rate scenarios and the effect they would have on the Budget and was submitted to the 2021-22 Pre-Budget Submissions.
The report contains three further findings:
- Between 2007-08 and 2020-21, Commonwealth debt increased from 4.7% of GDP to 42.5% of GDP.
- The Budget deficit could blow out to $109 billion in 2030-31, more than double the currently expected deficit in that year, if GDP growth averages 4.1% per year rather than the forecast 5.2% growth. 4.1% is the average annual growth rate which prevailed between 2012 (the end of the mining boom) and 2020 (the start of coronavirus restrictions)
- Between 2007-08 and 2020-21, Commonwealth debt per person increased over ten-fold, from $3,263 to $33,126 in real terms.
Download the report here.