These graphs should make Treasurer Jackie Trad think twice before spending the $1B windfall increase in coal royalties.

Queensland borrows on the international market, and that market is likely to reflect what happens in the US interest rate market, with the USD still the effective reserve currency of the world.

History suggests that a return to more normal rates of interest is occurring and that rates could easily double from here.

Last year’s budget predicted that government debt would be $33,758,000,000 and interest $1,706,000,000. This implies a 5.05% average cost of funds.

News reports predict that total government sector debt will increase from approximately $71 B to $83 B within 3 years. Bulk of that will be added to government debt, increasing it by a third at the same time as interest rates are likely to rise.

Even without an increase in rates, the extra $12 B will require $606 M to fund it. With an increase in rates it is likely that all of the royalty windfall will be needed, and then some.

It would also be wrong to regard the increase in royalties as more than a windfall. As the graph below shows, just as with interest rates, what goes down, will go up, and vice-versa, on time scales of only a few years.

“Commodity prices are a cyclical game, and the state treasurer should bank them in good financial management, rather than squandering them as though they are recurring revenues.”  Graham Young, Executive Director, Australian Institute for Progress.