Chalmers to reveal $500 billion debt reduction in new intergenerational report

Treasurer Jim Chalmers is set to release a landmark long-term budget forecast on Monday that will show Australia's gross government debt tracking far lower than previously expected — a shift worth more than $500 billion in nominal terms by the early 2060s, sparing future generations from a significant financial burden even as near-term budget pressures continue to mount.

The seventh intergenerational report, a document required by law to project the state of the nation's finances across a 40-year horizon, will reveal that successive budget surpluses, stronger-than-expected revenue and targeted spending cuts have meaningfully improved the long-term fiscal outlook compared with forecasts made just two years ago.

How the debt picture has shifted

When Chalmers released his first intergenerational report in August 2023, gross government debt — which has since crossed the $1 trillion mark — was projected to reach more than a third of GDP by the early 2060s. The updated report will show that figure falling to roughly a quarter of GDP over the same timeframe.

Expressed in 2062 nominal dollar terms, the gap between those two forecasts amounts to more than $500 billion in debt that future taxpayers will no longer need to carry.

A central driver of the improvement is a dramatically better budget bottom line than was anticipated two years ago. The projected deficit for 2062-63 is now expected to come in at close to 1.5 per cent of GDP — around 1.2 percentage points lower than was forecast in the 2023 report. While every intergenerational report in the series has predicted large deficits from the late 2030s onwards, the trajectory has shifted materially in the right direction.

For historical context, the very first intergenerational report — introduced by then-treasurer Peter Costello in 2002 — warned that health and aged care pressures would push the budget into the red through to the 2040s, with a projected deficit of 5 per cent of GDP, equivalent to around $135 billion, by 2042. Monday's report represents a substantially more optimistic picture than anything forecast in that era.

Surpluses and spending cuts doing heavy lifting

Part of the improvement stems from two consecutive budget surpluses that significantly outpaced expectations. When Chalmers delivered his 2023 intergenerational report, he was working from a projected surplus of $4.2 billion for the 2022-23 financial year, with a deficit of $13.9 billion expected in 2023-24. In reality, the 2022-23 surplus came in at a record $22.1 billion, followed by a further surplus of $15.8 billion the following year.

The report will also capture the benefit of spending cuts contained in this year's budget, with total government spending as a share of GDP projected to be 1.3 percentage points lower than the 2023 forecast — a saving worth close to $100 billion in nominal 2062 terms.

Among the reforms counted on to deliver those savings is Health Minister Mark Butler's ambitious overhaul of the National Disability Insurance Scheme. Chalmers acknowledged that savings achieved through measures like the NDIS reforms would not only improve the long-run fiscal position but reduce the interest costs borne by taxpayers over coming decades.

"We've made a lot of progress in the budget — paying down the debt we inherited, finding savings, restraining spending and addressing structural pressures — but we know there's more work to do," Chalmers said.

"By getting the budget in better nick, we can rebuild our fiscal buffers at a time of heightened global uncertainty as we make room for more of the things Australians need and deserve, like more investment in Medicare, aged care, housing and tax cuts."

The report will also confirm that tax collections are not expected to exceed the historical ceiling of 24.2 per cent of GDP recorded in 2005 and 2006 — a figure that sits slightly below what was forecast in the 2023 edition of the report.

Global turbulence adds to near-term pressure

Despite the long-run improvement, the near-term budgetary environment is becoming more challenging. Interest rates on 10-year US government bonds climbed above 5 per cent this week for the first time since 2007, reflecting a global repricing of public debt that is exposing fiscal vulnerabilities in major economies, most notably the United States, where gross debt is expected to reach $US41 trillion by year's end.

Those global dynamics are feeding directly into the cost of Australian government borrowing, with interest rates on domestic debt also moving higher. While the structural improvements flagged in Monday's report offer considerable relief over the long term, the immediate interest burden on the federal budget is increasing — underscoring the government's argument that fiscal discipline now translates directly into savings for future taxpayers.

What the report means going forward

The intergenerational report series was established precisely to force governments to reckon with long-range financial pressures that don't appear in a standard budget cycle. Monday's seventh edition will serve as a scorecard not just for this government's economic management, but as a baseline against which future administrations will be measured.

With the report due for public release on Monday, the Treasurer is expected to use it as a platform to make the case that disciplined budget management today — including ongoing NDIS reform and restrained spending growth — is the foundation for fiscal resilience in an increasingly volatile global environment.