A sharp increase in interest on combined federal and state government debt is helping maintain budget commitments, though it is putting added pressure on national finances and household budgets. A new report has found that interest payments across Australia’s public sector will total $48.1 billion this year, creating major challenges for future fiscal policy and efforts to control inflation.
At present, government spending continues to exceed revenue, with deficits expected to continue in the coming years. According to the independent Parliamentary Budget Office, the national net operating balance, which measures the difference between revenue and expenses across all levels of government, has dropped by nearly $30 billion in 2024 to 2025. This comes ahead of a likely budget update that may involve new cost-of-living measures such as extending electricity rebates.
The $48.1 billion interest bill, equal to roughly $1700 per person, comes as governments manage rising debt levels, persistent inflation and weaker-than-expected productivity growth. The Commonwealth government accounts for over half of total interest payments, and projections indicate national debt could reach $1 trillion depending on the assumptions used in the upcoming mid-year review. The average interest rate on this debt has increased to 4.6% due to changes in the global bond market.
Economists are concerned that ongoing deficits and weak productivity growth could contribute to further inflation. The Parliamentary Budget Office has warned that net debt in most states and territories is at historically high levels and still rising. The Northern Territory and Victoria have the highest debt ratios in relation to the size of their economies, adding to concerns around long-term fiscal sustainability.
The broader economic outlook remains mixed. Although household spending rose sharply in October by 1.3% with an increase in discretionary purchases, the underlying economy appears to be operating at full capacity. This limits potential growth without triggering inflation, especially if productivity does not improve. Decisions made in the December budget update around spending and borrowing could play a major role in shaping Australia’s economic future over the next decade.
