TL:DR

Australia’s government debt is climbing steadily—both in absolute terms and as a share of the economy. Recent official forecasts and market signals reveal a tough fiscal reality: debt is growing five times faster than the economy, creating a debt “snowball” that threatens long-term stability.

There are a few choices to fix this. Reduce borrowing, boost GDP growth, lower interest costs, run inflation hot or do asset sales and structural reforms. Other than for decreasing interest rates or running hot, none of the options are immediately actionable for politicians.

But like in the U.S., UK, EU, Japan and elsewhere, government debt will be rolled/refinanced over longer terms, interest costs will be added (thus creating the debt snowball effect) and when required, the central bank will monetise the debt. And on that last point, unless something in the nation-building category is done Australia will be purchasing its very own QE Infinity train to nowhere and the only question will be whether it comes from the U.S., or Japan.

Keep reading for the detailed metrics.

Current state of Australian government debt

As of 2023–24, gross government debt stands at around $940 billion, or about 40% of nominal GDP. Forward estimates show this rising to nearly $1.22 trillion by 2028–29, which will push the forecast debt-to-GDP ratio from 40% to close to 50%, over four years.

Hello?

These numbers already represent a significant annual borrowing increase of ~6.7%, but they don’t fully capture the compounding impact of rising interest costs on the debt stock (the snowball). With government bond yields averaging around 4% (average of 5/10 year bonds) interest payments add a sizeable and growing fiscal strain that will need to be financed via further borrowing, or budget adjustments. Adding in capitalised interest takes projected annual debt growth to ~10.2%, or 5x GDP growth.

What would have to be done to keep debt-to-GDP at 40%?

The Reserve Bank of Australia (RBA) recently reaffirmed that nominal GDP growth will remain capped at 2% annually, reflecting modest real growth and subdued inflation.

Here’s the problem. To hold the debt-to-GDP ratio steady at 40%, nominal GDP growth must keep pace with nominal debt growth. Given current borrowing of $940 billion and interest costs of say 4%, that means:

Under the official budget path, Australia would need to hit average nominal GDP growth of roughly 6.7% per year just to stabilise the ratio (translation: not going to happen).
When factoring in the realistic compounding of interest payments, rolling interest into new debt, the required growth rate jumps to over 10% annually on average (translation: definitely not going to happen).

Why is this effectively impossible?

Sustaining ~10% nominal GDP growth over multiple years is practically unheard of for a mature economy like Australia. By comparison:

Australia’s long-term nominal GDP growth typically sits in a descending channel of between 3–5%.
The RBA’s 2% forecast (reaffirmed today in its August 2025 SOMP) reflects steady but modest real growth and inflation.
Reaching 10%+ growth would require either a rare economic boom, rapid productivity gains, or unusually high inflation, all unlikely under current conditions.

This predicament is not unique to Australia. The U.S., for example, faces a similar but even more acute challenge in managing soaring debt levels despite recent bursts in quarterly GDP growth. You can read more on that in my recent blog here.

The snowball effect

When debt growth outpaces economic growth, it triggers a compounding spiral:

The debt-to-GDP ratio rises as new borrowing adds to the stock.
Interest payments increase with the growing debt, requiring even more borrowing (snowballing).
Fiscal flexibility shrinks as more budget dollars go toward servicing debt.
Refinancing risk grows as maturing debt rolls over at higher interest rates.

What can be done?

Australia’s options to stabilise or reduce its debt ratio are limited and challenging, especially under the current government. But, what are they?

Boost GDP growth through major reforms, strategic foreign policy, and regulatory clarity that fosters digital economy expansion (😂).
Reduce borrowing by cutting deficits significantly (🤣).
Pursue asset sales or structural reforms (😴).
Lower interest costs.
Run the economy hot (inflation) to reduce the real debt burden on fixed-rate debt.

Which is more likely?

Option 4 is the most probable course of action and the most well worn playbook across developed nations (and would also contribute to Option 5). That said, along with it will come a lower AUD making imports a lot ore expensive, unless the USD also declines, which it might.

Still, given Australia is unlikely to sustain 10%+ GDP growth and because the ALP is expected to remain in power for the foreseeable future, debt will continue to accumulate. The snowball will grow with more interest costs and that’s why servicing this growing ball of unproductive debt will increasingly depend on maintaining low interest rates, since GDP growth alone won’t close the gap.

In summary, Straya will buy a QE Infinity train to nowhere, just like everyone else has

Australia faces a macroeconomic challenge. Without dramatic structural change, government debt will grow faster than the economy (reaffirmed by the RBA today), pushing the debt-to-GDP ratio well beyond 50% in five years. To stabilise this ratio would require nominal GDP growth exceeding 10% annually—a totally unrealistic scenario that’s not going to happen in today’s environment.

There’s now more than a tad of urgency for credible fiscal strategies and structural reforms to avoid escalating debt pressures, and preserve some semblance of economic resilience.

But it’s no different to other indebted countries and it’s inevitable.

Most likely outcome? Unless something in the nation-building category is done pronto, interest rates will need to come down and Australia will need to purchase its very own QE Infinity train to nowhere, instead of just renting it short-term, like it did in November 2020.

See you in the market.

Mike

Australia’s debt dilemma: why stabilising debt-to-GDP requires 10%+ GDP growth, or much lower interest rates