“In 11 of the past 14 years, the ACT Government has has borrowed to pay interest on accrued debt.” JON STANHOPE & KHALID AHMED reveal how borrowing to pay interest is stunting the ACT’s growth.

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

This quote, like many others, is attributed to Einstein. Although it is unlikely Einstein said this, his authority is invoked by financial advisers stressing the perils of a debt trap, and elementary maths teachers explaining the power of exponential growth.

In a recent article, we explained the main drivers of the $1.389 billion increase in expenditure that Treasurer Chris Steel incorporated in the 2026-27 budget, from forecasts that he had published just 12 months ago for the four-year period 2025-26 to 2028-29.

We explained that $1.07 billion of that increase related to employee expenses and commensurate superannuation costs, because these were not fully reflected in the previous budget.

In fact, his previous budget forecast reflected a cut of 0.8 per cent, in nominal terms, (and much more in real terms) in the wages bill for 2026-27, which he corrected in this budget by adding $383 million for this year alone.

We also noted the other single largest increase in expenditure in this budget is in interest payments.

Table 1 details the forecasts of revenue and interest costs incorporated in the 2025-26 budget (Table 1A), the forecasts in the recently released 2026-27 budget (Table 1B), and the increases, i.e., the new revenue and the new interest expenditure in this budget (Table 1C).

The table reveals some genuinely disturbing facts. 

There is a slowdown in revenue growth, albeit small, from the 2025-26 budget (Table 1A) to the 2026-27 budget (Table 1B). That was to be expected given the overly optimistic outlook on revenues in the preceding budget. In fact, there would have been a net decrease in revenue if the Commonwealth Government had not generously provided $702 million, purportedly, largely for health.

Interest costs on the other hand have accelerated, increasing from 18 per cent per annum in the 2025-26 budget to 19.4 per cent in this (2026-27) budget.

In fact, interest on past and new debt has been the fastest growing cost item for a number of years. The ACT Government has, as we have repeatedly pointed out, been borrowing to pay interest on its past debt, with the effects of this “eighth wonder” now clearly visible.

Over the past 14 years, i.e. before and after the pandemic, the government has, in 11 of these years borrowed to pay interest on accrued debt. Presumably the government has been advised by a professional Treasury that borrowing to meet interest payments inevitably leads to a compounding debt and interest challenge.

In this respect the budget has incorporated an increase of $235 million, for the period 2025-26 to 2028-29, in interest costs over and above the forecasts in the 2025-26 budget.

The increase in interest costs in this budget period consumes, therefore, almost 28 per cent of the new revenue of $842 million, starkly highlighting the erosion of budget flexibility.

While interest payments as a proportion of total base revenue average 9.4 per cent across the budget and forward years to 2028-29, more than a quarter of new revenue needs to be applied to meet the increase in interest costs (Table 1C).

Big revenue questions the ACT budget doesn’t answer

Annual budgets, in general, are about decisions on only the marginal increases in revenue and expenditure. This is because almost all of the existing budget is already committed to services and entitlements. 

Zero-based budgeting is resource intensive as well as disruptive, leading to uncertainty and tension for internal and external stakeholders.

It is possible, of course, that a government may decide to redirect some existing expenditure by discontinuing a program/service, or by finding and redirecting genuine efficiencies.

Neither zero-based budgeting, nor a major reform are the norm, and it is only the marginal capacity of the budget that is typically available to a government, when preparing the annual budget, to apply to emerging needs or to address unforeseen problems.

It is obvious that marginal capacity will be increasingly constrained as interest costs consume an increasing portion of the budget. The government no longer needs to make choices between one desirable initiative and another more beneficial policy. Rather, its choices become more and more difficult as the interest costs compound, reaching a point where all the choices available to the government are potentially of a low priority.

On the revenue side, depending upon the incidence of specific measures to extract more revenue, the consequences range from subdued economic growth in the medium term, or unattractiveness of the jurisdiction as a place to do business in the long term, or the immediate social and financial impacts on people who can least afford to pay.

On the expenditure side, the choices change from difficult to impossible: from a balance between addressing the problems of today and avoiding the problems of tomorrow, to a choice between dealing with one critical problem and another.

Ultimately, the government loses the capacity to deal with any of the problems, while creating ethical dilemmas for itself. Budgets then are mere media events, seeking to create a narrative that isn’t grounded in reality.

This latest budget provides tangible evidence of the progression that we have described. 

Consider, for example, that all the new revenue in net terms, as we have explained in our previous articles, has come from the Commonwealth for health care and from NSW as a back payment for hospital services, while other own-source revenue has decreased.

More than a quarter of that revenue will inevitably go towards increases in interest payments. The remainder will go towards a shortfall in the salaries budget that had not been addressed previously.

Budget misery as the chickens come home to roost

While a treasurer may be legally entitled to use those funds as they see fit, we believe it to be questionable to apply funds provided by the Commonwealth for a specific purpose, for example to address life-threatening shortages in health care, for other purposes. It is surely, for example, unethical to shortchange health of the funds announced and received for that purpose, especially as the ACT Government has deliberately cut the health budget in real terms.

As the interest costs as a proportion of revenue (in percentage terms) approach the long-run revenue growth rate, the budget choices become increasingly difficult, reaching the impossible. This aspect is well discussed in literature on public financial management and understood by practitioners. The rating agencies invoke the same concept under a (structurally) related metric of Net Debt to Revenue Ratio.

We note that this critical aspect of budget flexibility and its sustainability have not been considered or addressed in the report (by Saul Eslake) to the Select Committee inquiring into the sustainability of ACT’s finances.

Typically, capacity constraints appear as the interest costs reach 5-6 per cent of revenue. If debt must be incurred for short-term needs, careful budgeteers seek to maintain the ratio below 5 per cent. We note the interest costs were forecast to reach 7 per cent when the treasurer made his infamous comment about cheap debt. Notably, in this budget, they are forecast to reach 11 per cent.

However, the trends were visible in the last decade. Since 2012-13, deficits in the primary balance (a metric that we have explained previously) have accumulated to $5.2 billion, and cumulative interest costs are $2.9 billion. Both these amounts contributed to debt. These figures exclude the liabilities associated with public private partnerships, such as the light rail, but include the recurrent annual discharge of liabilities.

In conclusion it is important to ask: Why have the interest costs in this budget exceeded previous forecasts, despite the debt profile being largely unchanged? 

The obvious answer is because of the increase in the cost of debt. Over coming years, the budget forecasts new borrowings as well as the refinancing of existing debt as it matures. The once cheap debt is now more expensive and will become even more so in the coming years.

Treasurer Steel could be feeling the power of compounding. He may also have some regrets about his now infamous advice on borrowing when debt is cheap.

Sick budget steals health money to look better

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