Economists and financial markets expect the Reserve Bank to lift its record cash rate from 0.1% in June and raise it to around 2% by the end of the year. The cash rate has not been increased since 2011, when it stood at 4.75%.
According to the budget documents, interest paid will increase to $26.3 billion by June 2026, the latest projection provided in the forward estimates. This figure is currently $17.1 billion and is gradually increasing over the forecast period to reflect both the amount of debt outstanding and the rising cost of raising new debt in the bond market.
But if market conditions are any indication, the actual figure will likely exceed that amount: 10-year bond yields were 2.98% on Monday, well above the 2.3% assumed by the Treasury through 2025. -26, and that’s before the Reserve Bank begins to officially tighten its policy.
Bond markets don’t think Australia is suffering unduly from its fiscal management, and Australia’s Office of Financial Management received more bids than it could handle at the week’s bond auction last.
Martin Whetton, head of bond and interest rate strategy at Commonwealth Bank, argued that the government’s net debt position is estimated at “just” over 30% of GDP and that government payments interest as a percentage of the budget remains extremely low.
By comparison, Japan’s public debt is a staggering $12.2 trillion, or 266% of GDP, the highest of any developed country, and yet the 10-year cost of money sits at 0, 24%.
“Fiscal repair is a noble idea (for a household), but it’s far from a priority,” Mr Whetton said. “As long as nominal growth is growing faster than debt growth and its cost, measuring absolute levels of debt is irrelevant,” he said.
Other analysts have different views.
EQ Economics managing director and Judo Bank adviser Warren Hogan has argued that the likelihood of keeping nominal growth above funding costs to reduce debt burdens is simply not sustainable. . He believes that a stable and prosperous economy is one where interest rates and economic growth “comprehendly align.”
“The experience of the past seven years is not normal,” he said. “It is abnormal and undesirable, and characterized by a lack of economic dynamism, low productivity growth and below-potential economic activity.”
While Hogan agrees there is no immediate need to cut the deficit, he is adamant against providing further fiscal stimulus to an economy that is operating at capacity.
Australian debt is among the safest in the world, enjoying an industry-leading triple-A rating by major rating agencies.
A key draw for investors is the premium earned by Australian bonds over their US counterparts. The national currency’s 10-year yields paid 0.1% more on Monday than those of the United States, at 2.8%. This premium was even higher a few weeks ago, at 0.5%.