$2 trillion of debt and climbing – Australia’s great big IOU is getting bigger

The nation’s governments will owe a combined $2 trillion by the end of the decade as the states and territories borrow at extraordinary rates that will force them to spend more of their budgets servicing their debts.

Analysis released today by the independent Parliamentary Budget Office shows that in the case of Tasmania, interest repayments are on track to soar by more than 6000 per cent because of a blowout in debt levels while NSW and Victorian taxpayers face an increase of more than 400 per cent.

The budget office, which has reviewed all state, territory and federal budgets, said deficits across them were all expected to narrow by the turn of the decade with small net operating surpluses in many cases. The federal government is the largest outlier with a deficit of $25.3 billion forecast for 2029-30.

But government debt, particularly that carried by the states and territories, is growing sharply.

According to the budget office, the states and territories had a combined $158.3 billion in gross debt in 2018-19. Federal gross debt was almost $650 billion.

By the end of this decade, state and territory gross debt is forecast to reach a combined $770.9 billion – a 387 per cent increase. Federal government debt is expected to reach $1.2 trillion, a 92 per cent lift.

Victoria faces the biggest debt load, forecast to reach $244.9 billion, an increase of 635 per cent. NSW’s debt is expected to climb by 440 per cent to $219.4 billion.

But the largest increase is in Tasmania, where debt is on track to soar by 1850 per cent, from $600 million to $11.7 billion. Not only is debt expected to soar, but the state’s interest bill is forecast to explode by 6280 per cent from $10 million in 2018-19 to $638 million in 2029-30.

Before COVID, the federal government accounted for 80 per cent of all government debt. By 2029-30, the states and territories will account for almost 40 per cent of the expected $2 trillion in outstanding debt.

Only the federal government and Western Australia are expected to keep their increase in gross debt to double figures over the period, although all parts of the country are facing a lift in the share of their revenue that goes to paying their interest bill.

“The interest costs of paying off debt are forecast to take up a larger share of government revenue, rising from 4.1 per cent in 2024-25 to 6.2 per cent in 2028-29,” it said.

While debt is climbing, the budget office said it was growing at a more gradual rate than expected in the round of budgets released last financial year. That was due to debt levels being a little better than forecast across most jurisdictions.

Federal gross debt alone was more than $20 billion lower than had been expected.

The budget office said state and territory government spending is expected to climb steadily, going from a combined $263.5 billion ahead of the pandemic to $510 billion by the end of the decade.