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Chapter 1: What is the main topic discussed in this episode?
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.
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Chapter 2: Why should we be concerned about rising government debt?
Now, by international standards, we're not too bad. You might describe us as the cleanest dirty shirt. The UK and many European countries are closer to 100% of GDP, not far off the US, while Japan is perhaps the most interesting example of all. Its government debt burden has exceeded 200% of GDP for many years, yet it remains a prosperous, stable, and highly functional society.
Now that debt has still created a lot of challenges in Japan and other countries should not be following suit and pushing up to those levels. I'm really just trying to highlight that there is no magic threshold where economies stop functioning or major trouble emerges. I don't expect all these fiscal pressures to ease anytime soon and I certainly don't have an answer to how all this ends.
Maybe economies will grow their way out of these debt burdens through stronger productivity and economic expansion. That's the outcome we'd all like to see. Or maybe we'll have to take our medicine and restore fiscal discipline through a combination of spending restraint and higher taxes. That could work, but it could be tough on the way through.
Or maybe inflation will just be allowed to run hotter than we've become accustomed to for a period, and we'll inflate our way out of debt. We've seen that at times through history. I meet a lot of smart people in my job and for the most part when I ask this question I get scenarios rather than answers.
It's a really difficult one to say how it plays out like a lot of things in the world of economics and finance. Part of the reason for that is that the outcomes rest in the hands of politicians and voters and that makes it really tricky to predict how things will go.
Whenever I find myself down the rabbit hole of rising government debt and all of the consequences, I do end up back at one simple principle, and that is I don't want all of my money invested in money. Cash, term deposits, fixed income, they've all got a really important role to play. They provide liquidity, stability, and income, and that helps investors sleep at night.
But what they don't give you is any sort of protection against inflation or or the threat of policy makers taking these sorts of actions that we've talked about. In contrast, assets like shares represent ownership of businesses, and businesses can innovate, they can adapt, and they can often pass on those rising costs to their customers.
Property is another one, it provides an exposure to land and buildings, then you've got infrastructure assets, you've got commodities, those sorts of things are needed every day by society.
So look, I do not know how the debt story ends, but in a world of potentially rising debt burdens and ongoing fiscal pressures, what I do know is that I want to ensure that at least a decent chunk of my wealth is invested in things that policymakers can't print more of. Thanks for listening, team. I hope that was useful. We'll talk again soon.
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