The March budget projected interest payments on the public debt to rise from $17 billion this fiscal year to $25.6 billion by 2025-26. But that was based on much lower interest rates than the government is currently facing.
Independent economist Stephen Koukoulas compared the situation on the budget to that of people who had fixed-rate mortgages, saying the budget was facing a debt cliff.
“The budget is going to go from these ultra-low interest rates to much, much higher rates and that’s going to have a huge impact,” he said.
“Public debt interest costs will explode if interest rates stay where they are now, let alone what happens if they continue to rise.”
It is not just the debt already on the government’s balance sheet that is becoming more expensive.
A key part of the Reserve Bank’s response to the COVID recession has been to buy government debt to maintain downward interest pressure on that debt. He was aiming for an interest rate of just 0.1% on 3-year government bonds.
The interest rate on 3-year bonds is now 3.9%.
The bank holds $72 billion in federal debt which, unless the budget results in a surplus, will have to be rolled over between July of this year and April 2025. Interest rates on all of this debt will be much higher than current rates. .
The first major tranche of this cheap debt that will become more expensive is worth $13.2 billion and will affect federal finances in April of next year.
Higher interest rates on public debt will burn taxpayers, but long-term investors could benefit.
Western Asset Management’s head of Australian operations, Anthony Kirkham, said while inflation was tough now, it should ease in 2023.
This meant that investing in bonds with high interest rates offered a chance to guarantee good returns.
“The situation we find ourselves in now is that Australian fixed income securities offer an attractive yield premium over other developed market bond markets. Investors are getting risk-efficient returns as well as strong income generation. .
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