As borrowing costs rise and spending costs go up, federal debt could double in the future from emergency pandemic spending.
Treasury economist Stephen Anthony predicts that net debt could rocket from $750 billion to $1.7 trillion by 2032-33 as future budgets are weighed down by commitments for defence spending, the National Disability Insurance Scheme NDIS aged care and unfunded public sector superannuation liabilities.
According to Anthony, the chief economist at Macroeconomics Advisory, pre-election cash splash spending next week's federal budget risks could lead to a switch to fiscal austerity in the coming years without restraint and reform.
All of this combined spending requires significant structural reform. We're looking at a budget that doesn't include all of that. We have a lot of issues that the government that is elected in May will have to deal with. Treasurer Josh Frydenberg maintains that debt, now forecast to peak at less than $1 trillion, is manageable with the federal budget less than a week away.
However, he warned that surging inflation around the world, particularly in the United States, will push interest rates higher and pressure the Commonwealth's currently zero borrowing costs.
We should see the weighted average cost of borrowing for the Commonwealth of Australia over the next five or six years rise by at least that, and this large structural deficit that underpins our budget is going to add to the stresses that we face. According to Anthony, significant reform is necessary to avoid savage spending cuts in order to prevent a debt crisis, regardless of who wins the May election.
The global bond rates have been rising this year with inflation becoming more entrenched rather than transitory.
Major central banks, including the US Federal Reserve, have begun tightening their cycles, with chairman Jerome Powell signalling as many as six rate hikes this year to tame inflation.
Reserve Bank of Australia Governor Philip Lowe believes that a rate rise this year is plausible, while he promises to be patient until the official unemployment rate falls below 4 per cent and wages growth is so far elusive.
The federal debt bill was fuelled by $314 billion in emergency pandemic spending, such as JobKeeper, as the national economy was shut down forcibly during the epidemic.