Labor warned it could face higher borrowing rates, lower credit rating if public spending grows as $1 trillion debt looms

Labor has been warned it may face higher borrowing costs if its spendathon continues, as government debt is set to balloon to $1 trillion sooner than expected.

Commonwealth Bank’s head of market strategy and rates research Adam Donaldson told The Australian that federal gross debt will surpass this massive benchmark by the first week of April.

This arrives one month before Treasurer Jim Chalmers will deliver his budget where spending cuts and new sources of revenue are anticipated.

Gross debt was forecast to hit $993b by the end of this financial year in Treasury’s mid-year fiscal and economic update.

The Australian Office of Financial Management has already noted this level has been surpassed.

AMP’s chief economist Shane Oliver said a higher percentage of debt to GDP, which currently sits around 34 per cent in Australia, could force ratings agencies to downgrade the nation’s AAA credit rating.

“The ratings agencies will want to see clearer evidence that the ratio of debt to GDP is stabilising and potentially starting to come down on a longer term basis,” Mr Oliver told SkyNews.com.au.

“If you see a deterioration in that outlook, that’s the sort of thing that could prompt a ratings downgrade.

“When you see ratings downgrades … it can mean each notch lower you go from AAA to AA- or AA+ … could add 20 to 30 basis points to the borrowing cost for the federal government.”

Australia currently holds a AAA credit rating from three leading firms: S&P Global, Moody’s and Fitch Ratings.

However, both S&P Global and Fitch voiced concerns that large public spending could threaten the nation’s stellar rating.

“The ‘AAA’ rating on Australia may be at risk if election promises result in larger, structural deficits, and debt and interest expenses rising more than we expect,” S&P wrote in the lead up to last year’s election.

Fitch’s director of Asian Sovereign Ratings, Jeremy Zook said Australia’s AAA rating in the was not at risk in the near term, but massive debt and looming deficits could pose problems in the medium term.

“When we think about the medium term, that’s where a lot of our focus will be,” Mr Zook told Business Now in May.

“If we see a sustained upward trend in Australia’s government debt, which is not our current baseline, but if we do see a situation where fiscal deficits remain high and growth underperforms and that adds challenges in terms of fiscal consolidation, that is where the risks could arise.”

The 2025-26 budget deficit is on track to be $36.8b – about $5.3b lower than the election forecast.

The fastest growing areas of spending include the NDIS, hospital payments, medical benefits payments, interest payments on debt and the childcare subsidy.

Mr Oliver stressed Australia needed to ensure a “gradually declining budget deficit” to ensure Australia does not find itself at risk of a ratings downgrade.

“It probably won’t get much worse from here if we manage to contain the size of the budget deficit and have it gradually falling as a share of GDP,” he said.

“But the big question is whether we’re able to do that because we have a history in Australia, like in recent years, that each budget update we see a high level of spending in the economy.”

Labor’s budget will blow out by $57b over the coming decade due to higher hospital payments to the states alongside other unexplained spending increases planned by the Albanese government, The Australian Financial Review reported at the start of February.

Mr Chalmers’ large spending agenda faced heated criticism after the Reserve Bank of Australia hiked the cash rate last week.

RBA governor Michele Bullock was forced to admit public spending had contributed to inflation and the hike after Mr Chalmers repeatedly said Labor’s spending did not play a role.