The federal budget is set to receive a whack from the bond market when the treasurer reveals a major upward revision to interest repayment costs in the mid-year economic and fiscal outlook.
Jim Chalmers acknowledged that billions of dollars would be added to forecasts for government expenditure in the December budget update, as rising bond yields compound the cost of servicing $1 trillion of Commonwealth debt.
It will also forewarn of weaker economic growth and higher inflation, Dr Chalmers said in a speech on Friday.
"We're not immune from the consequences of two wars, both impacting almost every economy in one way or another, posing risks to global growth, pushing up global inflation, and pushing up borrowing costs," he told the Citi A50 Economic Forum in Sydney.
As well as consternation about unsustainable global government debt levels and the Middle East conflict, competition for debt capital with AI companies has sent bond yields to 15-year highs in recent weeks.
The mid-year update will be the first time detailed estimates are produced for 2030/31, which is when much of the cheap 10-year bonds issued to finance COVID-era borrowing will expire and have to be refinanced at a higher rate.
That means billions more in annual repayments will be added to the federal balance sheet, Dr Chalmers told a Politico podcast.
"It's one of the big pressures on the budget that we are working our way through as we get closer to handing down the mid‑year budget update towards the end of the year," he said.
"How many billions (more) remains to be seen. The global economy's a pretty dangerous place right now, and we see that reflected in bond yields and in other ways as well."
Independent economist Chris Richardson reckons interest costs - already projected to be one of the fastest-growing expenditure items for state and federal governments - will be an extra $18 billion a year higher by the mid-2030s.
"Those are big bucks: $18 billion a year is the equivalent of doubling JobSeeker," he said on X.
Interest repayments on commonwealth debt were projected to exceed $46 billion by 2029/30 in the May budget.
Shadow treasurer Tim Wilson said Dr Chalmers' excessive spending was stoking inflation and driving up interest rates.
But it isn't clear where budget savings to reduce the deficit will come from.
Even seemingly low-hanging fruit, such as Labor's attempts to save $3 billion by reducing the private health rebate for over-65s to the same level as the rest of the population, have been knocked back by the coalition.
While the AI boom was adding to borrowing costs around the globe, investment in data centres and the renewable energy projects needed to power them is also a shining light in Australia's economy for now.
Budget forecasts for business investment this financial year are expected to be revised up to five per cent in the December update, from 2.5 per cent in May, Dr Chalmers told the Citi forum.
Combined with an upward revision from four per cent to 7.4 per cent in 2025/26, it represents $50 billion in additional business investment over three years, he said.
Despite the failed Firmus IPO and a slew of high-profile cancellations due to community pushback raising a few jitters among data centre investors, the outlook is still strong.
Economists at Commonwealth Bank recently revised up their projections for Australia's potential data centre pipeline.
Dr Chalmers on Friday also announced draft regulations to make it easier for smaller lenders to compete with the big banks by increasing the cap on banks' covered bond issuance.
Lifting the cap would give small and mid-tier banks more room to price competitively and invest in better services, which is good for competition and good for customers, Australian Banking Association chief executive Simon Birmingham said.