Australia is hurtling towards a staggering $2 trillion in combined national and state debt by the end of the decade, with interest repayments in one state on track to soar by an unprecedented 6280 per cent.
It comes as a concerning debt milestone was hit in the US overnight, sparking fears of a “doom loop” that could cripple the world’s largest economy.
Here in Australia, analysis released on Wednesday by the independent Parliamentary Budget Office (PBO) shows that, as gross government debt is forecast to hit $2.034 trillion by 2029-30, states will be forced to spend an increasing amount of their budgets just paying off interest.
“The increase in national gross debt is being driven by both Commonwealth and State borrowing,” the report states. “In 2026-27, forecast State gross debt is around $650 billion while Commonwealth gross debt is around $1 trillion.”
By the end of the decade, state and territory gross debt is forecast to reach a combined $770.9 billion – a 387 per cent rise. Federal government debt is expected to reach $1.2 trillion, a 92 per cent increase.
The PBO broke down the debt situation by states and territories, making for an alarming read.
“The Northern Territory continues to forecast the highest net debt per capita, followed by the ACT, Victoria and the Commonwealth, while Western Australia maintains the lowest forecast level,” the report states.
“Prior to the pandemic, there were a number of jurisdictions (including ACT, Queensland and Tasmania) which recorded negative net debt per capita, reflecting financial assets exceeding debt obligations.
“Jurisdictions have since experienced a marked increase in net debt, driven by a combination of declining financial assets and higher borrowings, particularly during and after the global financial crisis and the Covid-19 pandemic.”
State’s 6000 per cent interest spike
The sharpest budget shock is unfolding in Tasmania, where interest repayments are on track to explode by a staggering 6280 per cent, rising from $10 million in 2018-19 to $638 million by 2029-30. The state’s gross debt is set to jump 1850 per cent over the same period, climbing from $600 million to $11.7 billion.
The report said Tasmania remains particularly vulnerable due to its narrow revenue base, deriving around 43 per cent of its total revenue from Commonwealth GST grants while generating just 32 per cent from its own sources in 2024-25.
Victoria faces the largest debt burden of any state, with gross debt projected to surge 635 per cent to $244.9 billion by the end of the decade. NSW is close behind, with debt climbing 440 per cent to $219.4 billion. It means taxpayers in NSW and Victoria will foot interest bills that will more than quadruple, rising by over 400 per cent.
On a federal level, Treasury is forecasting the annual interest bill to hit $29.5 billion this year, rising to $42.2 billion before the end of the decade.
The PBO said interest payments will swallow up a larger slice of public spending as time goes on.
“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 2029‑30,” it said.
Australia to cross ‘grim’ milestone today
While the states account for a rapidly growing share of the nation’s liabilities, the Commonwealth is set to cross a milestone on Thursday morning as total federal debt breaches a historic level for the first time in Australian history.
Andrew Lilley, the chief interest rate strategist at Barrenjoey, confirmed that federal debt levels would exceed $1 trillion on Thursday.
“We will be over $1 trillion for only 24 hours, as there’s a debt repayment on Friday, but after September we’ll spend the next few years above $1 trillion,” Mr Lilley told The Australian.
“It hasn’t so much broken $1 trillion as it has just touched the wall and done a tumble-turn.
“It’s a higher debt level than Australia is used to, but at around a third of GDP that’s a much lower level than international investors are used to.
“That being said, there’s a bit of concern about global debt demands – and that’s been pushing longer-term interest rates higher over the past two months.”
Rising debt levels have ignited a political war of words in Canberra. Shadow Treasurer Angus Taylor said hitting the trillion-dollar threshold was a direct consequence of government spending.
“A trillion dollars of Labor debt is a grim milestone for Australia,” Mr Taylor said. “It is what happens when you have a Labor government that cannot control its spending or the budget. Labor is spending at levels we have not seen outside a recession in around 40 years, yet Australians are being told to pay more tax and accept higher prices.”
Treasury hits back
Treasurer Jim Chalmers defended the government’s fiscal management in parliament, pointing to international credit rating endorsements.
“Moody’s, the second global ratings agency in the course of the last couple of weeks, reaffirmed Australia’s AAA credit rating, and they did that because of the responsible way we have gone about managing a Budget, getting gross debt down $200bn lower than we inherited and the trajectory that those opposite left us when we came to office,” Dr Chalmers said.
A spokesman for Dr Chalmers said Labor’s record on managing debt was stronger than the Coalition’s.
“If the Coalition had been in power today, gross debt this year would already be approaching $1.2 trillion,” the spokesman said.
Budget pressures are being made worse by soaring structural spending in health, hospitals, childcare, housing and defence at the federal level, alongside cost overruns on state infrastructure projects such as Melbourne’s Suburban Rail Loop.
To pay for the spending, Treasury forecasts show Dr Chalmers is on track to become Australia’s highest income-taxing treasurer since records began, with personal income tax as a share of GDP reaching 18.6 per cent in 2026-27.
Ratings agency S&P Global reaffirmed Australia’s AAA credit rating this month, but noted the dependence on tax increases.
“Australia’s planned property tax increases and savings measures should help mitigate rising structural spending pressures,” S&P Global said.
State budgets also face uncertainty from potential changes to the GST distribution formula, following an interim report from the Productivity Commission into Western Australia’s GST deal which found the arrangement could cost federal taxpayers nearly $60 billion.
Under current arrangements, all states are guaranteed not to be left worse off, but that guarantee ends in 2030. When asked about the findings, Dr Chalmers stood by the current arrangement.
“We’re not going to go through it page by page and respond to all of the detail in the interim report, except to say a fair go for WA is very, very important to us,” Dr Chalmers said.
Despite the mounting interest costs, the PBO analysis concluded that Australia’s national fiscal position remains sustainable in 24 out of 27 long-term scenarios, provided economic growth holds firm and interest rates moderate over time.
‘Doom loop’: US passes far more concerning milestone
If you thought Australia’s debt issues made grim reading, the US just held our beer as it crossed its own staggering threshold overnight, sparking fears of a “doom loop”.
The US gross national debt has surged past $40 trillion ($56 trillion) for the first time, government data showed, outstripping earlier forecasts at a pace fuelled in part by President Donald Trump’s invalidated tariffs.
The uptick in borrowing comes as longer-term US obligations linked to social security and health care have been growing, while interest payments have climbed as well.
Total public debt outstanding stood at $40.05 trillion at the close of business on Tuesday, according to data released Wednesday by the Treasury Department.
This stands in contrast to an earlier forecast by the Congressional Budget Office that overall borrowing would hit $39.4 trillion by the end of fiscal year 2026.
Rising US debt comes as concerns over inflation, war in the Middle East and government spending have been driving investor worries, and the cost of borrowing has grown.
Yields on long-term Treasury bonds rose on Tuesday to the highest level since 2007, reflecting growing price pressures due to the war in Iran and anxiety over US deficit spending.
The increase forces the US government to refinance debt at the highest rates since before the 2008 global financial crisis.
But the US Treasury Department moved to steady the long-term bond market early on Wednesday, sending yields lower.
The federal government operates at a deficit and borrows money to help cover its obligations, including its war spending and tax cuts.
As buyers demand higher yields, that drives up the Treasury’s borrowing needs. With two months left to go in the fiscal year, the government’s interest cost so far for 2026 is $1.17 trillion — a 15 per cent increase on the same period a year before. That in turn adds to the debt, potentially fuelling further investor calls for higher rates, in a pattern known as a “doom loop”.
“It’s been well known for a while that the United States government was on a pretty unsustainable path with deficits,” said Jessica Riedl, a budget and tax fellow at the Brookings Institution.
“Over the last few years, the United States has moved into roughly $2 trillion deficits, even during peace and prosperity,” she added.
While deficits of three per cent to four per cent of GDP used to worry financial markets, she noted that levels are closer to six per cent to seven per cent of GDP now.
“That has made markets more nervous,” she said.
As inflation pushed interest rates higher, interest costs on the debt have risen as well, and costs linked to an ageing population are pushing up deficits.