ep 374 | Should we worry about rising government debt?
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On Point with Craig's Investment Partners. The information provided here is general in nature and it's not financial advice. It doesn't take into account your situation, objectives, goals or risk tolerance. All investments are subject to risks and none are guaranteed. Before you make any investment decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners financial advice provider disclosure statement, please visit our website, which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
There's a lot of questions I get asked very, very frequently. And one of them is how worried we should be about rising government debt. And that is a very fair question, especially in light of the recent budget, which showed that our books here in New Zealand as a nation are still under a lot of pressure. The Treasury does not expect the government to return to surplus until 2028, 2029. Net core crown debt is forecast to peak. at more than 46% of GDP in 2027, 2028, before starting to decline. And that debt is becoming more expensive to service as well. The interest bill is more than $10 billion this year, and that is money that we can't spend on healthcare, education, infrastructure, or tax relief.
Now, we are far from unique, and concerns about the United States fiscal position have been growing too because US public debt has risen from 60 odd percent of GDP two decades ago to more than 120% today, and it is expected to keep climbing in the years ahead. So should investors be worried? Well, yes and no. If you or I live beyond our means, if we borrow too much, if we can't repay our debts, we will eventually run out of options. However, governments aren't households, and that is a really important distinction. Countries that borrow predominantly in their own currency have much more flexibility. So here in New Zealand, we borrow in New Zealand dollars. The U.S. borrows largely in U.S. dollars. Japan borrows in yen.
And remember that these governments all control their own money supply. That gives them an option that households don't have. It's a really important difference. It means they can create more of the currency they need to service their obligations. that doesn't mean they can't do so without consequence. Now, history would suggest that there are definitely limits to how far this approach can be pushed before you see things like rising inflation, currency weakness, or investors that demand higher returns to compensate them for those increased risks. So it's not a strategy you can use forever, but it is something that governments can do that we can't as households. Governments can create more money, but they can't control the confidence that markets and investors have in them.
And that is why the real risks associated with high government debt could be a little more subtle than people assume. The most likely outcome isn't necessarily default, where a government simply can't pay its bills. Instead, it might be higher inflation, it might be persistently higher interest rates, it might be slower growth, financial repression, or higher taxes, maybe a combination of all of the above. Now, that is not an inevitable outcome, but it does become more relevant when you've got an ageing population, when you've got rising healthcare costs, and you've got governments that have become very accustomed to running deficits. When it comes to New Zealand, we also need to keep some perspective.
Our fiscal position has deteriorated significantly. Before the pandemic, net government debt sat at about 20% of GDP. I'm not going to get into the debate of how we measure it. That's a story for another day. Pre-pandemic, 20% of GDP. It's more than doubled from those levels today, and Treasury expects it to keep going up before it stabilises.
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