Further interest rate hikes likely

His comments prompted an immediate reaction in financial markets, which began to price in the cash rate target - the official interest rate target set by Australia's central bank - to hit 4 percent by early next year.

But a similarly energetic reaction probably took place in Tasmania's Treasury department, which last year sent out a warning about interest rates in its fiscal sustainability report.

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The report warned that even small interest rate rises could threaten the state's fiscal sustainability if net debt was high.

Released last year, the report outlined projections based on different scenarios, including one where net debt doubles to $10 billion by 2030.

Under this pessimistic scenario, Treasury estimated that a two percentage point increase in interest rates would increase annual debt servicing costs by approximately $849 million in 2034-35.

"That was written at a time when interest rates were lower than they are today, and expected to remain much lower," said independent economist Saul Eslake.

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He stressed that it was prudent for Treasury to look at scenarios involving higher interest rates and higher levels of debt.

But are these scenarios now moving closer to reality?

With inflation surging above 5 per cent, and interest rates ratcheting up, public sector workers in Tasmania are demanding pay rises that are double the amount budgeted by the government.

Meanwhile the government is spending more on COVID measures, as well as infrastructure. The budget also does not include estimates for expensive projects like Marinus Link, which are more likely to progress since Labor's federal election win.

Then, after 2026, the state is expected to lose $100 million in GST revenues each year for ten years after distribution of the tax between the states is revamped.

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Net debt, which was zero just a few years ago, is expected to balloon to over $5 billion by 2026, but could be much more, given the wage demands and higher interest rates on state debt.

Economists like Mr Eslake have called for tax reform as a solution to the problem, but the Premier, Jeremy Rockliff, has ruled out tax hikes or asset sales for now.

Mr Eslake said the government might consider three revenue-generating options - replacing stamp duty with a "broad-based land tax"; broadening the scope of payroll tax to capture the many small businesses that currently fall under the threshold; and introducing new land taxes for non-resident mainland property owners.

"None of these options are politically palatable," he said.

"But with the perfect financial storm buffeting the state, they may become necessity."

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