Chalmers wipes more than $500b off nation’s debt – in four decades’ time

Hundreds of billions of debt that would weigh on future taxpayers is likely to be avoided, a long-term forecast on the state of the federal budget will reveal, even as the government faces growing spending pressures and a blowout in the nation’s interest bill.

The seventh release of the intergenerational report, to be released by Treasurer Jim Chalmers on Monday, will show gross government debt far lower than expected and deep spending cuts in this year’s budget improving the budget bottom line into the 2060s.

Yet the immediate pressure on the budget is growing with another step-up in the interest rate on Australian government debt amid a global repricing of public debt exposing fiscal problems in the United States.

Then-treasurer Peter Costello introduced intergenerational reports in 2002 to provide an outline of the pressures on government finances over the next four decades. Costello’s first report warned that a surge in spending on health services and the age pension would drive the budget into the red all the way to the 2040s.

Chalmers’ 2023 update forecast that gross debt, which recently hit $1 trillion, would reach more than a third of GDP by the early 2060s. But the report to be released next week will show gross debt around a quarter of GDP.

In 2062 nominal dollar terms, the smaller level of debt is worth more than $500 billion.

The lower debt level is being driven by an improvement in the budget. The report will show the deficit to be 1.2 percentage points lower, at close to 1.5 per cent of GDP in 2062-63, than had been forecast by Chalmers in his previous intergenerational outlook.

Every intergenerational report has predicted large budget deficits from the late 2030s out to the 2060s. Costello’s first report forecast a deficit of 5 per cent of GDP – the equivalent of $135 billion – by 2042.

Part of the improvement is due to stronger revenue over recent years. Chalmers released his first intergenerational report in August 2023, when he expected a $4.2 billion surplus for the just-completed financial year and a deficit of $13.9 billion for 2023-24.

Instead, the 2022-23 surplus was eventually revealed to be a record $22.1 billion, which was followed by a $15.8 billion surplus the following financial year.

Another improvement is expected to flow from spending cuts contained in this year’s budget, putting pressure on Health Minister Mark Butler to deliver his ambitious overhaul of the National Disability Insurance Scheme. Next week’s report will show spending as a share of GDP 1.3 percentage points lower than had been forecast in 2023, a saving in nominal 2062 terms of almost $100 billion.

The report will also confirm tax collections are not expected to climb above the historical high of 24.2 per cent of GDP seen in 2005 and 2006. It is slightly lower than what Chalmers had forecast in 2023.

Chalmers said savings such as those made on the NDIS not only improved the budget bottom line in the long term but helped reduce interest costs borne by taxpayers.

“We’ve made a lot of progress in the budget – paying down the debt we inherited, finding savings, restraining spending and addressing structural pressures – but we know there’s more work to do,” he said.

“By getting the budget in better nick, we can rebuild our fiscal buffers at a time of heightened global uncertainty as we make room for more of the things Australians need and deserve, like more investment in Medicare, aged care, housing and tax cuts.”

But the immediate cost to taxpayers from higher interest rates is growing.

On Wednesday, interest rates on 10-year US government debt rose above 5 per cent for the first time since 2007. American gross debt is expected to reach $US41 trillion by year’s end, with the Trump administration on track for a budget deficit of $US2 trillion.

Interest on US debt helps set rates on the global debt market, with all developed economies facing an increase in their bond yields.

On Wednesday, Australia sold $1 billion in debt that will be repaid in April 2037. The interest rate on that debt is 5.39 per cent, an increase of more than 8 per cent since early August.

Chalmers told parliament that Australia was in a good position to deal with the growing economic uncertainty caused by the lift in yields on government bonds, the jump in Brent crude to $US108 a barrel, and likely higher rates in the US, Britain and Europe.

But shadow treasurer Tim Wilson said Chalmers should be reducing government spending to take inflation pressures off the Australian economy.

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