PDI Calculator

Public Debt Interest (PDI) Calculator

The PDI Calculator estimates the costs of servicing debt associated with hypothetical changes in the amount of Commonwealth Government borrowing compared to a baseline level of Commonwealth Government borrowing.  It can be used to estimate the likely borrowing costs associated with a specific policy; it would not be appropriate to attempt to use it to calculate interest costs associated with aggregate debt levels.

The calculator assumes borrowings are financed by 10-year bonds only, where the nominal interest rate is fixed until the bond matures (after 10 years).  When the bond matures, the amount is refinanced with another 10-year bond with the projected interest rate for that year.

Input

Long term nominal interest rate for 10-year bond (%)

Change in the level of Commonwealth borrowing ($m)

2020-212021-222022-232023-242024-252025-262026-272027-282028-292029-302030-31

Output

2020-212021-222022-232023-242024-252025-262026-272027-282028-292029-302030-31Total to 2023-24Total to 2030-31
Cumulative change in gross debt at start of year ($m) 0.000.000.000.000.000.000.000.000.000.000.00n/an/a
PDI impact on fiscal balance ($m) 0.000.000.000.000.000.000.000.000.000.000.000.000.00
PDI impact on underlying/headline cash balance ($m) 0.000.000.000.000.000.000.000.000.000.000.000.000.00



Caveats

  1. While the Parliamentary Budget Office (PBO) makes every effort to ensure that the calculator is useful and up to date, the results produced from the calculator do not constitute the provision of professional advice from the PBO.  The PBO is not responsible for how the tool and its results are used.
  2. The calculator is a stylised version of how public debt interest is calculated and applies a number of simplifying assumptions (see Detailed calculations tab from the downloadable spreadsheet for more information).  It does not reflect the complexities of the Government’s debt management strategy, including decisions around instrument selection and issuance.
  3. The calculator is designed for educational purposes and provides estimates for public debt interest impacts resulting from increases or decreases in Commonwealth borrowing compared to a baseline.  Since the calculator assumes changes in borrowing are refinanced indefinitely, it should not be used to simulate scenarios where an initial level of borrowing is repaid in a subsequent year.
  4. This calculator assumes that changes in borrowing are financed by the issuance of 10-year Treasury bonds.  In practice, the AOFM issues a variety of bonds with differing maturity dates to finance Government debt, so this assumption is less reasonable for larger amounts of borrowing.  Therefore the calculator should not be used to estimate public debt interest for aggregate debt levels.
  5. In the current COVID-19 environment, the assumed interest rates over the period to 2030-31, are highly uncertain.  In particular, the impacts of potential fiscal and monetary policy could have significant implications for Government bond interest rates and hence affect public debt interest estimates produced by the calculator.
  • Public debt interest

    Public debt interest (PDI) is the borrowing costs of the government, mainly incurred through issuing and servicing Government debt, and recorded as a cost to the Government in the budget.

    PDI impacts estimated in the calculator reflect the interest costs associated with the change in borrowings that are input by the user. These are calculated using the projected interest rates for future borrowings.

    PDI is an important element when considering the overall cost of new government policies, called 'measures', and their impact on the budget. Although each measure that has a financial impact will result in a change to public debt interest, the long-standing convention in Budget Paper No. 2 is that the public debt interest is not attributed to any individual policy measure.

    In some cases, the interest the government pays (or forgoes) to secure the funding can be the largest underlying cash balance cost associated with the policy.  For this reason, it is standard practice for the Parliamentary Budget Office to include the estimated public debt interest impact in costings when financial assets are purchased or sold.  This calculator allows users to estimate the public debt interest impact for costings that don’t necessarily involve purchasing or selling financial assets.

  • Bonds and debt

    Bond

    Bonds are investment securities where an investor lends money to a borrower (typically a company or a government) for an agreed period of time, generally in exchange for regular interest payments and the repayment of the amount lent (principal).  Bonds are a form of debt - an entitlement to receive or an obligation to pay fixed or varied interest payments over a set period of time.  Bonds are a means for companies or government to raise funds to finance ongoing operations, new projects or acquisitions.  Bonds have maturity dates at which point the principal amount must be paid back in full or risk defaulting.

    The maturity date is set when the bond is issued.  Since the calculator is estimating future debt, we make assumptions on the type of bond that will be used.  The PDI Calculator assumes all debt is financed by 10 year Treasury bonds.

    For more information about the bonds and maturities issued by the Commonwealth Government, see the ‘Debt statement, assets and liabilities’ in the Budget Paper No. 1 of each budget and the Mid Year Economic and Fiscal Outlook. Budgets are available at https://budget.gov.au/index.htm.

    Government Debt

    The Government finances its activities either through receipts or borrowing.  When receipts fall short of payments, the Government borrows by issuing government bonds (known as Australian Government Securities (AGS)) to fund its operations and spending.  The amount of money that the government owes its lenders at a particular point in time is known as Government debt.  In broad terms, it measures how much successive governments have spent over the receipts they have collected.

    The Australian Office of Financial Management (AOFM) is responsible for issuing AGS and managing the Government's financing activities.

  • FAQs

    Why are the Commonwealth borrowing amounts limited to between -$1 billion and $1 billion per year?

    In reality, Governments sell a variety of bonds to finance their debt, not just one type of bond as the model assumes.  For individual policy proposals with smaller financial impacts, this assumption is more valid, however it is less reasonable to assume large amounts of borrowings are being financed by the one type of bond.  Therefore the calculator restricts the borrowing amounts to a limited range.

    For a one-off change in borrowing in 2020-21, why does the PDI impact jump up in 2030-31?

    The PDI Calculator assumes that the nominal interest rate is fixed from the day the bond is issued to when it matures.  For instance, if a 10-year bond is issued in 2020-21 with a 0.89 per cent nominal interest rate, the same rate is applied each year until the bond matures in 2030-31.  At this point, it is refinanced with another 10-year bond with its associated nominal interest rate in 2030-31 (ie 2.81 per cent based on the yield path assumptions from the 2020-21 Budget).  This results in a significant increase in the PDI impacts in 2030-31 when it is refinanced at a much higher rate.

    The interest rate profile for the period to 2030-31 can be found in the downloadable spreadsheet in the “Detailed Calculations” tab.

    Why doesn’t the PDI impact go to zero when I borrow in one year and pay back the same amount in a subsequent year, even after accounting for capitalised interest?

    The PDI Calculator should not be used to simulate the impact of an increase in borrowing in one year and the subsequent repayment of that borrowing in another year.  Any change in borrowing (increase or decrease) is a change relative to a baseline level of borrowing in that year and has no link to changes in borrowing in previous or future years.    Any reduction in Commonwealth borrowing in one year should not be interpreted as a repayment of previous borrowing.

    The PDI impact resulting from a change in borrowing reflects the interest costs based on the interest rate for the year the change in borrowing occurred and this may be different from the interest rate of a previous borrowing.

    For example, say borrowing increased by $100 million in 2023-24 and then decreased by $100.89 million in 2024-25 (accounting for capitalised interest of $0.89 million from 2023-24).  The calculator treats the $100.89 million as a separate change-in-borrowing event with its own interest rate, rather than a repayment.  As the projected interest rates for 2023-24 and 2024-25 are different, the PDI impact estimated by the calculator is non zero (reflecting the difference in interest rates between the two years).

    Note that if the increase and decrease in borrowing occurred in years where the projected interest rates are the same, the PDI impacts would perfectly offset each other, resulting in a zero PDI impact.

    The interest rate profile for the period to 2030-31 can be found in the downloadable spreadsheet in the “Detailed Calculations” tab.

    Why does the PDI calculator only go out for 11 years when bonds issued by the government can extend beyond the 11 years presented here?

    Consistent with the PBO’s written costing advice for policy proposals, the calculator estimates the PDI impacts for the current budget year and the following ten years.

If you find this online tool useful, have suggestions for improvement or comments you would like to share with us, please provide your feedback to feedback@pbo.gov.au.