Treasurer Jim Chalmers has used a speech in Japan to blame massive AI data centre investment for an expected soaring of Australian Government debt interest payments.

The man in charge of Australia’s $2.8 trillion economy warned that the highest Federal Government bond yields in 15 years will push up annual Commonwealth debt interest payments, which at close to $30 billion are now costlier than the Pharmaceutical Benefits Scheme.

Less than a week after the Reserve Bank of Australia raised the cash rate to a 15-year high of 4.6 per cent, Dr Chalmers told an audience at Chiba that “massive AI investment is increasing competition for capital” — meaning higher annual payments on government debt for those who lend Australia money through investing in Australian bonds.

“All this is pushing up bond yields across the world,” Dr Chalmers told the 63rd Annual Australia-Japan joint business conference on Monday.

“In the past month, Australian 10-year yields reached a 15-year high.

“American 10-year yields reached a 24-year high.

“And as everyone here knows, Japanese 10-year yields reached their highest in three decades.

“None of us are immune to the impact of rising yields.

“Even a country like Japan, with its substantial assets, will have to reckon with higher financing costs.”

Shadow treasurer Tim Wilson said Dr Chalmers would be unlikely to fool Japanese investors.

“If the Treasurer thinks Japanese investors will buy his spin that AI is the inflation Godzilla, someone needs to tell Jim Chalmers that they know it’s a fictional story,” he told The Nightly.

“Shrewd Japanese investors will be looking to the cost of energy, labour market productivity, regulation, tax and sovereign risk, and concluding the Treasurer is the problem and undermining Australia’s economic strength.

“Japanese investors will see that with the Treasurer running deficits and projecting 40 years in the future, that he’s the causing of Australia’s inflation problem, and the reason interest rates are rising, as are rising mortgage rates and prices at the supermarket.”

But Barrenjoey’s chief interest rate strategist Andrew Lilley said longer-dated 10-year Australian Government bond yields were mirroring equivalent 10-year US Treasury yields as a result of AI investment in the American economy.

The refinancing of COVID-era debt, when it matures in 2030, could affect Australian Government debt interest payments if bond yields stayed at higher levels.

This would mean higher annual payments on Australian 10-year bonds for the likes of global insurers and pension funds who typically lend money to Australia.

“The current yield move would have to hang around for another four years for this to really be felt in the Government’s interest burden,” Mr Lilley told The Nightly.

“But the bond market believes it will hang around. You look at the yield curve, and the bond market tells you they think this is a permanent change.

“So, that’s the worry for the Government; seasoned bond veterans are telling them yields are going to be high for years to come and they’re looking at the refinancing task that’s coming over the next four or five years and it does look a bit more expensive to refinance that debt now.”

Shorter-dated three-year Australian government bond yields are more reflective of movements in the Reserve Bank of Australia cash rate, but this would also affect Commonwealth debt payments.

“If interest rates stayed high for another four years, then we’d have a much larger refinancing task to worry about,” Mr Lilley said.

The 10-year bond yield on Australian Government debt is above 5.3 per cent for the first time since May 2011 while the equivalent three-year bond yield was last above 4.9 per cent during that month more than 15 years ago.

Dr Chalmers on Sunday admitted he had no idea how high borrowing costs could go, given the surge in bond yields, that will mean higher annual payments on Australian government debt until bonds reach maturity.

“We don’t yet know how this will all net out, is you would have seen around the world this spike in borrowing costs in the major economies, will also play out here,” Dr Chalmers told ABC Insiders host David Speers.

“The pressure will still come though on Australia, and you’ll see in the mid‑year Budget update a magnitude of some billions of dollars, unfortunately, in additional pressure coming from those bond yields which are changing so quickly that they put additional pressure on borrowing costs here and in all of our peer countries.”

But Dr Chalmers downplayed the need for a surplus Budget, following a call from former RBA governor Philip Lowe.

“Well, we’ve been able to get the deficits down much smaller, and we delivered a couple of surpluses in the time in office,” he said.

“I think the pressures on the budget are pretty well known and pretty well canvassed. You can see that in every Budget and Budget update.”

Treasury’s final Budget outcome released last week had public interest debt payments adding up to $27.7b in 2025-26, which was $87 million more than the $27.6b forecast in the May Budget.

This was also more than the $23.1b spent on the Pharmaceutical Benefits Scheme during the last financial year providing cheaper, subsidised medicines that would otherwise be unaffordable for the likes of the elderly, low-income earners and those battling a chronic illness or disease.

The May Budget forecast debt interest payments would cost $31.9b in 2026-27, making it the eighth biggest expense after grants to the states and territories ($110.3b), support for seniors ($68.7b), the NDIS ($56.1b), Defence ($53.4b), aged care ($43.8b), Medicare ($37.6b) and hospital grant funding to the states ($37.5b).

Australian Government spending is projected to make up 26.9 per cent of GDP this financial year, which is the highest level in four decades outside of COVID with gross government debt already above $1t.