Federal Borrowing to Surpass States for First Time

The federal government is set to borrow more than all Australian states combined this financial year for the first time since the pandemic. The goal is to maintain essential services while managing growing budget pressures. However, with national debt approaching a record $1 trillion, concerns are growing about the long-term sustainability of this strategy.

In recent years, strong commodity prices gave the federal budget a rare surplus while state governments increased debt to fund infrastructure projects and cost-of-living support. That trend is shifting. The federal government is now increasing borrowing again to cover rising expenses including aged care and the National Disability Insurance Scheme.

Westpac expects federal borrowing to rise to about $150 billion in 2025–26, up from $100 billion the previous year. Of that, about $67 billion will be new debt and the remainder will be used to refinance existing loans. State borrowing remains significant, led by Queensland at $33.5 billion, but total new state debt is expected to stay below the federal figure. This would mark a break from the pattern of recent years.

These developments suggest a broader shift in how public finances are managed. The federal budget is likely to return to consistent deficits even as new tax policies are expected to be discussed at an economic reform summit in August. Credit rating agencies are monitoring the situation closely. Some states may face downgrades if they are unable to slow spending.

Despite growing debt levels, Australian bonds remain attractive to global investors which has helped keep borrowing costs steady. For now, access to funding is not a key issue, but managing long-term budget pressures could be one of Australia’s biggest challenges in the years ahead.

Source: Australian Financial Review, EY, S&P Global, CEIC Data