“We go into 2022 with confidence and a lot of hope. We have one of the highest vaccination rates in the world and now one of the strongest economic recoveries in the world. That is something that all Australians can be proud of.”

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But Market Economics’ Stephen Koukoulas said whichever party won next year’s federal election would have to deal with the large amount of debt run up over the past decade.

He said the Coalition’s cap on tax as a share of GDP would run into the growing cost of programs such as the National Disability Insurance Scheme and the government’s own promise to increase expenditure on defence. Labor had not outlined any spending cuts or revenue increases it might take to the election due by May.

“Whoever wins the election is going to have to deal with the state of the budget and the level of debt. I’m not saying we need an austerity budget, but small reductions in spending – maybe a quarter of a per cent of GDP – will certainly improve the situation,” he said.

“The debt level is sustainable but we’ve got record low interest rates. If rates go up 100 or 200 basis points, the net interest rate bill really starts going up.”

Net interest is expected to reach a record $14.8 billion in 2021-22, more than is forecast to be spent on the pharmaceutical benefits scheme this year.

And it is not just the federal government that has ramped up debt.

Australian households are the second most indebted in the world, according to the IMF, with only Swiss residents owing more. As a share of GDP, Australian household debt is at 123.53 per cent, with Switzerland at 131.9 per cent.

Just five other nations – Norway, Canada, Demark, the Netherlands and South Korea – have household debt levels above 100 per cent.

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Most debt is tied up in mortgages which, due to record low interest rates across the world, are at their most affordable this century. But some central banks have already started lifting interest rates to deal with emerging inflation pressures while banking regulators have raised concerns about the sharp increase in property prices that has occurred in many nations including Australia.

While the Reserve Bank has said it will not lift official interest rates until 2024, financial markets and economists believe the RBA will move as early as the middle of next year.

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