Interest payments have eclipsed the National Disability Insurance Scheme as the fastest-growing area of Commonwealth spending.
Higher interest rates are making debt more expensive to service and are likely to cost the federal budget tens of billions extra in the years ahead.
The higher cost of borrowing is expected to add up to $80 billion more in interest payments over the next 11 years.
Releasing the data ahead of the mid-year budget update on Wednesday, Treasurer Jim Chalmers said higher interest rates were not only hurting households but federal finances as well.
“We’re getting government debt on a better trajectory, but that debt is becoming more expensive to service,” Dr Chalmers said.
Banking revenue upgrades to the budget avoided $145 billion in interest payments over the 12 years, he said.
With interest rates moving higher, Treasury has updated its assumption for the cost of new borrowing to 4.7 per cent, up from 3.4 per cent in the 2023/24 budget.
Interest payments are expected to grow by an average of 14.4 per cent over the next decade, faster than the NDIS, which is projected to grow at a rate of 13.8 per cent.
At the May budget, the NDIS was expected to increase at an average rate of 10.4 per cent, faster than the 8.8 per cent average growth predicted for interest payments.
Hospitals, aged care and defence are the other three fast-growing areas of spending.
Despite these spending pressures, the mid-year update is expected to reveal a healthier budget bottom line than detailed in May.
The federal treasurer has played down the prospect of a second surplus, but the $13.9 billion deficit initially projected for 2023/24 financial year is likely to be smaller.
Few new major policy announcements can be expected, with any cost of living relief the government might consider to wait until the May 2024 budget.
St George Bank economist Jameson Coombs said there was a good chance the government could print a second consecutive budget surplus, after federal finances moved into the black for the first time in 15 years in the 2022/23 financial year.
“However, the government is likely to keep the numbers conservative,” he wrote in a note.
He said the mid-year update would likely show improvements on the revenue side thanks to resilient commodity prices and a rapidly growing tax take from households.
“Indeed, over the first four months of the 2023/24 financial year, total revenue is already tracking $8.4 billion above what was expected back in May when the government published its budget, while payments are $0.8 billion lower than expected.”