In August 2025, the United States federal government spend over twice its income, $689 billion versus receipts of $344 billion. Even doubling every American’s tax bill would not have closed that gap.
That imbalance is shocking, and all the more so because the accumulated public debt was already alarming. US federal debt held by the public was $29 trillion in April 2025. Net Interest payments totalled $934 billion in the eleven months to August. That even exceeded federal military spending. It represents forty cents of every dollar collected in personal income tax.
Yet financial markets barely flinched. Why?
It cannot be that investors have nowhere else to go. Sure, the US dollar remains the world’s reserve currency, but investors could still have rushed to sell, driving bond prices down and yields up. We saw just that in the UK, when bond markets took flight at Liz Truss’s proposed unfunded tax cuts.
It must be instead, that August’s numbers did not markedly change forward-looking expectations among major holders. Buyers did not insist on markedly lower prices, not this time. Market sentiment is an unpredictable thing, and the US government is playing with fire.
When governments owe too much money, they commonly cheat the lenders. They might lean on central banks to suppress interest rates. They can let inflation silently confiscate wealth from savers and pension funds. They might force banks, pension funds and others to buy government bonds through “prudential” regulations, what economists politely call “financial repression”.
New Zealanders over sixty likely remember this world. Inflation, interest rate controls, foreign exchange restrictions, spiralling public debt and government debt ratio requirements. It took a lot of tough decisions by brave and capable governments to extricate us from those problems.
Next time around we might not be so lucky. It is much wiser to nip inflation and deficit-spending in the bud, before they force painful adjustments
This brings us to New Zealand’s public debt problem. In June 2019, net core Crown debt sat at 19% of GDP, and Treasury was supporting the government’s 15-20% of GDP target range for this debt. It considered that an upper limit for prudence would be 30% of GDP.
Today? For this year’s Budget, Treasury projected that debt would be 44% of GDP by June 2026, and remain above 40% through to 2039. An adverse fiscal shock could easily lift those ratios above 60%.
Many prosperous countries have serious public debt problems today. That is a threat to global financial stability. New Zealanders beware.
Debt rating agencies monitor the growing risks. In May 2025, Moody’s, one of the world’s most prominent agencies, downgraded the US government’s long-term credit rating from Aaa to Aa1. This is the first time it has downgraded US long-term government debt. Britain lost its AAA rating in 2013. France recently tumbled to A+. Italy staggers along at BBB with debt at 135% of GDP. Germany is the only G7 economy still rated AAA by all three major agencies.
Some complacently argue that New Zealand’s public debt is manageable. After all, other nations carry far heavier burdens.
However, the US is special. Globally, the US dollars is a means of exchange, and to the extent justified as a store of value. The New Zealand dollar has no such anchor. We need to be more prudent.
Setting that aside, it is true that high debt is manageable if the income to service it grows faster than the mounting interest costs, and if the debt is not also increasing too fast because of ongoing deficit spending. But all this assumes no future shocks from earthquakes, cyclones, tsunamis or disease epidemics for livestock, trees, fisheries or people.
Treasury understands this. Its 30% prudent debt limit for normal times reflected painful lessons about small economy vulnerability and the need for a debt buffer. Budget 2025 plans to markedly exceed this limit for the foreseeable future. That does not represent fiscal prudence.
The first step back should be to stop spending so many billions of dollars so poorly. To do that requires political courage and an ability to lead high quality public debate. There are always interest groups benefiting from poor quality spending who will fight to preserve it.
It means remembering that debt borrowed today is tax collected tomorrow from citizens who had no say in its accumulation. Productive young people can emigrate.
Around that kitchen table most families understand the harsh reality of high debt, and the need for prudence. In politics, excessive public debt is the next government’s problem, until it is not. High public debt puts households at risk too. Voters beware.
Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE. - where this article was sourced
Yet financial markets barely flinched. Why?
It cannot be that investors have nowhere else to go. Sure, the US dollar remains the world’s reserve currency, but investors could still have rushed to sell, driving bond prices down and yields up. We saw just that in the UK, when bond markets took flight at Liz Truss’s proposed unfunded tax cuts.
It must be instead, that August’s numbers did not markedly change forward-looking expectations among major holders. Buyers did not insist on markedly lower prices, not this time. Market sentiment is an unpredictable thing, and the US government is playing with fire.
When governments owe too much money, they commonly cheat the lenders. They might lean on central banks to suppress interest rates. They can let inflation silently confiscate wealth from savers and pension funds. They might force banks, pension funds and others to buy government bonds through “prudential” regulations, what economists politely call “financial repression”.
New Zealanders over sixty likely remember this world. Inflation, interest rate controls, foreign exchange restrictions, spiralling public debt and government debt ratio requirements. It took a lot of tough decisions by brave and capable governments to extricate us from those problems.
Next time around we might not be so lucky. It is much wiser to nip inflation and deficit-spending in the bud, before they force painful adjustments
This brings us to New Zealand’s public debt problem. In June 2019, net core Crown debt sat at 19% of GDP, and Treasury was supporting the government’s 15-20% of GDP target range for this debt. It considered that an upper limit for prudence would be 30% of GDP.
Today? For this year’s Budget, Treasury projected that debt would be 44% of GDP by June 2026, and remain above 40% through to 2039. An adverse fiscal shock could easily lift those ratios above 60%.
Many prosperous countries have serious public debt problems today. That is a threat to global financial stability. New Zealanders beware.
Debt rating agencies monitor the growing risks. In May 2025, Moody’s, one of the world’s most prominent agencies, downgraded the US government’s long-term credit rating from Aaa to Aa1. This is the first time it has downgraded US long-term government debt. Britain lost its AAA rating in 2013. France recently tumbled to A+. Italy staggers along at BBB with debt at 135% of GDP. Germany is the only G7 economy still rated AAA by all three major agencies.
Some complacently argue that New Zealand’s public debt is manageable. After all, other nations carry far heavier burdens.
However, the US is special. Globally, the US dollars is a means of exchange, and to the extent justified as a store of value. The New Zealand dollar has no such anchor. We need to be more prudent.
Setting that aside, it is true that high debt is manageable if the income to service it grows faster than the mounting interest costs, and if the debt is not also increasing too fast because of ongoing deficit spending. But all this assumes no future shocks from earthquakes, cyclones, tsunamis or disease epidemics for livestock, trees, fisheries or people.
Treasury understands this. Its 30% prudent debt limit for normal times reflected painful lessons about small economy vulnerability and the need for a debt buffer. Budget 2025 plans to markedly exceed this limit for the foreseeable future. That does not represent fiscal prudence.
The first step back should be to stop spending so many billions of dollars so poorly. To do that requires political courage and an ability to lead high quality public debate. There are always interest groups benefiting from poor quality spending who will fight to preserve it.
It means remembering that debt borrowed today is tax collected tomorrow from citizens who had no say in its accumulation. Productive young people can emigrate.
Around that kitchen table most families understand the harsh reality of high debt, and the need for prudence. In politics, excessive public debt is the next government’s problem, until it is not. High public debt puts households at risk too. Voters beware.
Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE. - where this article was sourced
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