Federal budget 2025: Australia’s debt to soar past $1 trillion next financial year

Leading economists have warned Australia’s latest debt figures should be a cause of concern, despite the government’ arguing the Budget was “in better shape”.

Government debt will soar past $1 trillion next financial year and continue to grow across the forward estimates, despite the Federal Government talking up the gains it has made in reducing budget deficits.

Gross debt will hit $1.02tn next financial year and increase to $1.22tn over the following three years, while the ratio of net debt to gross domestic product (GDP) will also increase, peaking at 36.9 per cent in 2027-28.

Treasurer Jim Chalmers said on Tuesday that the Labor Government had “overseen the biggest ever fiscal improvement in a single term of government’’.

Treasurer Jim Chalmers said Labor had “overseen the biggest ever fiscal improvement in a single term of government’’.Picture: NewsWire

“Gross debt will hit $940bn this financial year, $177bn less than what we inherited,’’ Mr Chalmers said.

“This means we will avoid around $60bn in interest costs over the decade. These are some of the dividends of our responsible economic management.’’

While Australia’s debt position is lower than that for most of its peer economies, leading economic agencies said we were carrying too much debt, and “moving in the wrong direction’’.

“The medium-term budget outlook is getting worse, not better. Add to that the parlous nature of most state finances, in large part driven by unchecked vertical fiscal imbalance, and the structural view of the national balance sheet gets even worse,’’ Deloitte Access Economics, in its Budget Monitor, said.

“While near-term revenue windfalls have held net debt lower than expected this year, projections for the later years are moving in the wrong direction.”

Gross debt will hit $1.02 trillion next financial year and increase to $1.22 trillion over the following three years.

The government’s $940bn gross debt figure blows out by more than $280bn over the next four years, while net debt also increases every year, going up from $556bn to $768.2bn.

Gross debt as a proportion of GDP is projected to increase from 33.7 per cent this financial year to 36.9 per cent over the next three years, before dropping back by just 0.1 per cent the following year. It will continue to remain stubbornly high over the next decade, still forecast to come in at 31.9 per cent by 2035-36.

Mr Chalmers argued the Budget was “in better shape in every year over the forward estimates, than it was three years ago’’.

Despite this, net interest payments as a share of GDP will be higher than forecast in last year’s Budget, peaking at 0.9 per cent, or $26.9bn in 2027-28, before increasing again in dollar terms to $28.1bn the following year. From the current financial year out to 2028-29, the nation will pay a projected $109.6bn in interest payments.

Mr Chalmers said spending growth was expected to average 1.7 per cent over the seven years to 2028-29 – almost half the 30 year average of 3.2 per cent – achieved through a combination of spending restraint, budget savings and by banking revenue upgrades.

Westpac economists have warned that while near-term windfalls had helped the government’s balance sheet in the current year, we are still carrying too much debt.

While the spending figure is within the 2 per cent cap advocated by the Business Council of Australia, the ballooning debt figure, including as a percentage of the economy, is cause for concern for business groups and economists alike.

The fear is that the nation’s balance sheet is stretched, and ill-prepared for any serious shocks, with the Global Financial Crisis and the pandemic in the past requiring large spending boosts which blew out government projections.

Westpac economists have warned that while near-term windfalls had helped the government’s balance sheet in the current year, we are still carrying too much debt.

“As debt escalates, there will be less fiscal space to implement counter-cyclical measures to help absorb future shocks, as they were able to for the GFC and the pandemic,’’ Westpac economists said.

“This comes at a time when growing geopolitical uncertainty, increasing trade tensions, more frequent weather events and ongoing technological change may mean shocks are more frequent.’’

The Budget documents argue that Australia’s economy is well placed from a debt perspective by international standards.

“Australia has one of the strongest fiscal positions among peer economies,’’ the documents state.

“Australia is one of only nine countries to maintain a AAA credit rating from all three major

ratings agencies.

“Australia is estimated to have the fifth lowest gross debt-to-GDP ratio in the G20 in 2025.’’

Originally published as Federal budget 2025: Australia’s debt to soar past $1 trillion next financial year