Analysis: Govt Borrowing Cost to Rise Max A$5B End-2023 Even If Ylds Double, Triple

By Sophia Rodrigues

The recent sharp jump in government bond yields will push up Australian government borrowing costs but even if yields double next year and triple the year after, the rise will be no more than A$5 billion until year ended 2022-23.

The government’s recent budget update (MYEFO) in December (MYEFO) projects interest costs for 2020-21 year at A$17.2 billion. This is set to rise to A$17.5 billion in 2021-22 and return to A$17.2 billion the year after.

The amount of Australian government securities on issue is estimated to be A$852 billion at the end of 2020-21, A$991 billion end 2021-22 and A$1,059 billion end-2022-23.

It is important to note that recent jump in bond yields and further rise, if any, will only affect interest cost for new debt the government will be raising.

The MYEFO estimated weighted average cost of borrowing of around 0.9% for future issuance of bonds. This was higher than 0.8% estimate at the 2020-21 budget in October last year.

If we assume weighted average cost of borrowing of 1.8% in 2021-22, then increase in interest cost due to rise in yields (1.8%-0.9%) would be approx. A$1.5 billion. The cost for the 2021-22 borrowing would be the same for 2022-23, so another A$1.5 billion.

For 2022-23, if we assume weighted average cost of 2.7% for new borrowing, then increase in interest cost due to jump in yields (2.7%-0.9%) would A$1.2 billion.

For the remaining of the 2020-21 year, increase in interest cost due to new borrowing is unlikely to exceed A$200 million.

This takes total increase in interest cost of A$4.4 billion until end 2022-23 compared with the budget estimates, and assuming the same level of estimated borrowing.

It is worth noting that the key assumption in this analysis that weighted average yield doubles next year, and triples the year after, compares with the Reserve Bank of Australia’s current forward guidance that conditions requiring a hike in the 0.1% cash rate are unlikely to be met before 2024 at the earliest.