Malcolm Turnbull has warned of a mountain of debt - closing in on $500 billion - that future generations will have to repay unless the federal budget is brought under control.

“That will mean, inevitably, they will either have reduced government services or higher taxes or probably both,” the prime minister told ABC radio on Thursday.

“We cannot keep on living beyond our means and passing a larger mountain of debt on to the shoulders of our children and grandchildren.”

Treasurer Scott Morrison will need to issue a new direction within months allowing government debt to rise beyond $500 billion.

Treasury officials told a Senate committee debt was due to go above $500 billion early in the 2017/18 financial year and a new direction is needed from Mr Morrison in order for the Australian Office of Financial Management not to be in breach of its own laws.

The latest figure from the AOFM for Australian government securities on issue, dated February 24, was $477 billion.

The mid-year economic review forecast the figure to be $496 billion by the end of this financial year.

Treasury senior official Matt Flavel says the government’s figures show the “path of debt in nominal terms continues to rise over the medium term”.

In late 2013, then-treasurer Joe Hockey reached a deal with the Greens to get rid of the $300 billion debt ceiling.

But Mr Hockey soon after issued a direction to Treasury, without having to go through parliament, to ensure the total face value of stock and securities that may be on issue was limited to $500 billion.