Soaring interest rates on record levels of government debt will punch a $13 billion hole in the budget, with taxpayers poised to spend more on interest repayments than assistance to families or people with disabilities.

As new forecasts suggest the risk of a wage-price spiral is remote, Treasurer Jim Chalmers said the federal budget bottom line was facing the same hit from higher interest rates as the household budgets of ordinary mortgage payers.

Treasurer Jim Chalmers with RBA governor Philip Lowe and Reserve Bank of India governor Shaktikanta Das in Bali at the weekend meeting of G20 nations.Credit:AP

Gross government debt is at $875 billion and the March budget, handed down by then-treasurer Josh Frydenberg, forecast debt to climb beyond $1 trillion in 2023-24.

At the time, interest rates on government debt were assumed to average 2.2 per cent over the next four years. But since then, interest rates around the world have skyrocketed due to growing concerns about inflation.

Chalmers said interest rates were now averaging 3.5 per cent.

That increase will this year translate into the government paying $19 billion in interest on its debt compared to the $17.9 billion forecast in March. In 2025-26, the government now expects to pay an extra $5.4 billion.

“Just like millions of Australian families who now have to dig deeper into their pockets to make their mortgage repayments, rising interest rates are also having a significant impact on the government’s bottom line,” he said.

“Every dollar of borrowing in the budget now costs more to service. It’s more important than ever that the government is responsible with taxpayers’ funds.”

Chalmers said the government was now on track to spend $99.1 billion in interest in the four-year period from 2022-23 to 2025-26 compared with the March forecast of $86.1 billion.

Over that same period, the government is expected to spend $85.9 billion on family assistance payments and $80.9 billion on payments to people with a disability.

Treasurer Josh Frydenberg is congratulated by Prime Minister Scott Morrison after handing down the 2022 budget in March. Interest rates on global debt have soared since then.Credit:James Brickwood

The lift in interest rates has caught all governments by surprise over the past four months.

The federal government sold $800 million in debt at an interest rate of 3.41 per cent last week that will not be repaid until November 2032. In August last year, the same line of debt was sold with an interest rate of 1.2 per cent, and in March it was sold at 2.3 per cent.

Chalmers said that by 2032-33, the government could be spending an extra $18 billion a year in interest.

The treasurer, who is due to give an update on the economy and budget when parliament resumes on July 26, will hand down a fresh 2022-23 budget in October.

“The October budget will be all about responsible cost-of-living relief, implementing our economic plan and redirecting money wasted by our predecessors to more productive investments,” he said.

Deloitte Access Economics, in its latest business outlook, is also expecting the cost of government borrowing to lift.

Three months ago, it was tipping the key 10-year bond interest rate to average 2.2 per cent this financial year and next. It is now forecasting them to average 3.6 per cent in 2022-2 and 3.3 per cent in 2023-24.

The forecaster is expecting the economy to expand by 3 per cent this financial year, inflation to average 5.7 per cent and employment to grow by another 2.6 per cent after 3.1 per cent in the just completed 2021-22. It expects the jobs market to grow thanks to a lift in net migration, which is tipped to grow from 78,940 in 2021-22 to 171,130 this year.

Deloitte partner Stephen Smith said the biggest risks remained around how the Reserve Bank responded to the lift in inflation.

“Setting interest rates in the current environment is more than a little tricky,” he said.

“The post-pandemic high is fading quickly as house prices begin to turn downward and consumer confidence continues to slip. Add in the darkening global outlook and it becomes quickly apparent that the risk of raising interest rates too much needs to be balanced against the risk of not raising them enough.”

Deloitte expects the tight jobs market to generate a lift in wages growth, forecasting the wage price index to lift to 3.2 per cent this year and 3.5 per cent in 2023-24.

Smith downplayed concerns that the lift in wages growth would feed directly into a spike in inflation.

“The potential for a wage-price spiral is limited – the labour market looks very different today than it did in the 1970s and ’80s, with less co-ordinated wage setting and a less deliberate link between wage growth and inflation,” he said.

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