Should we worry about rising government debt?

One of the questions I get asked a lot is how worried we should be about rising government debt.

It’s a very fair question.

Budget 2026 showed that New Zealand’s books remain under pressure.

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Treasury doesn’t expect the Government to return to surplus until 2028/29, while net core Crown debt is forecast to peak at 46.1 per cent of GDP in 2027/28 before gradually declining.

That debt is becoming more expensive to service too.

The interest bill of more than $10 billion this year is money we can’t spend on healthcare, education, infrastructure or tax relief.

We’re far from unique, with concerns about the US fiscal position growing too.

US public debt has risen from 61 per cent of GDP two decades ago to more than 120 per cent today, and it’s expected to continue climbing in the years ahead.

Should investors be worried?

Well, yes and no.

If you or I live beyond our means, borrow too much and can’t repay our debts, we’ll eventually run out of options.

However, governments aren’t households and that’s an important distinction.

Countries that borrow predominantly in their own currency have more flexibility.

New Zealand borrows in New Zealand dollars, while the United States borrows in US dollars and Japan borrows in yen.

These governments all control their money supply, which gives them an option that households don’t have.

It means they can create more of the currency they need to service their obligations.

That doesn’t mean they can do so without consequence.

History suggests there are limits to how far this approach can be pushed before inflation rises, currencies weaken or investors demand higher returns to compensate for the increased risks.

Governments can create more money, but they can’t control the confidence markets and investors have in them.

That’s why the real risks associated with high government debt could be more subtle than many 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, persistently higher interest rates, slower growth, financial repression or higher taxes.

Maybe a combination of all of that.

That’s not an inevitable outcome, but it becomes more relevant when we have ageing populations, rising healthcare costs and governments that have become 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 around 20 per cent of GDP.

It’s more than doubled from those levels today, and Treasury expects it to rise further before stabilising.

By international standards, that isn’t too bad.

The UK and many European countries are closer to 100 per cent of GDP, while Japan is perhaps the most interesting example.

Its government debt burden has exceeded 200 per cent of GDP for many years, yet it remains a prosperous, stable and highly functional society.

The debt has undoubtedly created challenges, and it doesn’t mean other countries could push up to those levels.

It just highlights 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 don’t have an answer to how this all 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.

Restoring fiscal discipline through a combination of spending restraint and higher taxes could be more likely, although it’ll be much less enjoyable.

Maybe inflation runs hotter than we’ve become accustomed to for a period, and we inflate our way out of debt.

I meet a lot of smart people in my job, and most of them are only able to offer scenarios rather than answers.

A lot of this rests in the hands of politicians, and therefore voters, which could be what makes it so tricky.

Whenever I go down the rabbit hole of rising government debt and its consequences, I end up back at one simple principle.

I don’t want all my money invested in money.

Cash, term deposits and fixed income all have an important role to play.

They provide liquidity, stability and income, while helping investors sleep at night.

What they don’t do is give you any sort of inflation protection.

In contrast, shares represent ownership of businesses that can innovate, adapt and often pass rising costs on to customers.

Property provides exposure to land and buildings, while infrastructure assets and commodities are needed every day by society.

I don’t know how the debt story ends, but in a world of rising interest burdens and ongoing fiscal pressures, I want to ensure that a decent chunk of my wealth is invested in things that policymakers can’t print.

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