Rising bond yields will push up Australia’s borrowing costs by billions of dollars, Treasurer Jim Chalmers has warned, as the OECD urged governments to rein in spending and strengthen their finances.
The Paris-based economic body said yields had reached their highest levels in 15 years across the developed world, increasing pressure on public budgets and raising borrowing costs throughout the economy.
It called for governments to contain and redirect spending, improve public-sector efficiency and increase revenues to ensure debt remained sustainable and to preserve their ability to respond to major shocks.
Rising bond yields add to pressure on Australia’s budget
Commonwealth debt on issue has recently passed $1 trillion for the first time. Interest payments are expected to reach $29.6 billion this financial year and rise above $42 billion a year by 2029-30.
Dr Chalmers said the higher yields would have a “damaging impact” on budgets, including Australia’s, and that debt interest costs would increase by “billions of dollars”.
“We’re better placed than other countries in this regard when it comes to borrowing costs because our debt is a sliver of what other countries are carrying and we’ve got it down further since we’ve been in office from the trajectory that we inherited,” he told The Conversation’s Politics with Michelle Grattan podcast.
“But in the mid-year update, I think one of the things that people can expect to see is the damaging impact of higher bond yields on everyone’s budget, including ours.”
The OECD, led by former Australian finance minister Matthias Cormann, cut its forecast for Australia’s economic growth in 2027 by 0.1 percentage points to 1.7 per cent. It expects the economy to grow by 1.9 per cent in 2026.
The organisation said higher energy and agricultural commodity prices linked to the conflict in the Middle East would weigh on global growth. The impact was partly offset by continued rapid growth in artificial intelligence-related investment and production.
Investment in data-centre structures and technology equipment helped boost second-quarter economic growth in Australia, the United States and Canada, the OECD said.
Although the benchmark Brent crude price fell below 100 US dollars a barrel as Saudi Arabia prepared to reopen a key oil pipeline, the OECD said elevated petrol and diesel prices would continue to put pressure on inflation.
It raised its forecasts for Australian inflation to 4.5 per cent in 2026 and 2.8 per cent in 2027. A very strong El Nino could also affect food prices by bringing drier conditions to Australia and reducing agricultural production across parts of Asia.
