At the onset of Covid, governments around the world shifted to expansive fiscal policies and lowered interest rates to avoid economic shutdown. With Covid lock-downs behind us, why are most governments still spending considerably more than they were during that period? Brad Litt, Credit Trading Manager at Milford, talks to Ryan Bridge about why New Zealand is still grappling with persistent deficits post Covid, and how we compare to the US and Australia.

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Bridge talks Business: 20 May 2025
Episode Transcript

Ryan Bridge
Kia ora and welcome to Episode 33 of Bridge talks Business with Milford. Tomorrow’s budget day and we know there’s going to be no lolly scramble, but we also know that we will still come away with a structural deficit. This country, like many others around the world, still grappling with huge borrowing hikes post Covid, and without spending cuts that means deficit. This affects markets, public debt impacts our private earnings. So, ahead of the big reveal we’ll look at how and why. First though here’s your top five business bits from the last seven days.

1. Trump’s Big Beautiful Bill takes centre stage as trade deals fade into the background for now. It’s big on stimulus, tax cuts, little regard for debt which of course has investors a bit worried.
2. The rating agency Moody’s downgrading US debt last week, specifically calling out concerns about this trajectory. Whilst this is not really new news, it is yet another voice calling out, hey the emperor has no clothes.
3. US arms deals across the Middle East gave markets a shot in the arm last week, with promises of purchases of US planes and semiconductors.
4. Investors expecting a rate cut out of Australia from the RBA. Inflation has just about made it into the target band there with the help of government subsidies, but there has been a lot of political pressure on the RBA to cut too – so it’ll be interesting to see how the outlook is categorised there.
5. Elsewhere we will get an update on the state of global industrial confidence from the regular monthly surveys. Will we see an improvement in confidence as tariff pauses take effect?

Right, it is time for this week’s feature interview and we’re talking deficits, government deficits, what do they mean for markets, what do they mean for investors, what do they mean for us really. I’m joined this week by Brad Litt who is a Credit Trading Manager at Milford – and just a reminder this segment is informational only and should not be considered financial advice. Brad welcome to the podcast.

Brad Litt
Hey, good to be here.

Ryan Bridge
Good to have you on. All right, this is not the first time governments have been in debt or run deficits. Let’s go back to paint a bit of a picture to post-GFC, post-2008 when English and Key got into government. What was the debt situation like for us then?

Brad Litt
Yeah, post the GFC the governments were implementing austerity that was to curb these deficits that they had, and just slow down the build-up of government debt. In New Zealand this was done through reduced expenses as a percentage of the GDP. They moved from about 35% to 25% – that was done by about 2015. In the US they slashed a lot of discretionary spending – it was circa one trillion over 10 years. In Australia, fiscal consolidation was achieved there by lower spending but also increased revenue taking.

Ryan Bridge
Which is not the track we’re going down at the moment – austerity.

Brad Litt
No, so austerity measures obviously were with slowing growth.

Ryan Bridge
Yeah. So explain that to us – that the government was pulling back which meant that the wider economy felt it too.

Brad Litt
Correct.

Ryan Bridge
Does that mean that governments should spend more when we’re in situations like this?

Brad Litt
I mean that is kind of a very good question you can ask, and I’d say that governments might have learned that moving out of the GFC – there’s pretty slow sluggish growth, austerity measures meaning that this economic growth was a bit slower. And you’re kind of looking through Covid and seeing the large increase in the fiscal spend, increased government borrowing, reduced interest rates – all led to higher demand, increased growth but obviously that fueled inflation and we ended up having to increase interest rates further down the track.

Ryan Bridge
Yeah, and we all know this story right? We’ve been living it and feeling it. Can you just paint a picture of how bad the debt has got for, let’s start with New Zealand post Covid? It seems like once you’ve started the spending you can’t stop it, almost.

Brad Litt
That is correct. It’s very hard to reduce once you’ve started. You see that in New Zealand – it’s a good example. At the last update in December the Treasury increased their forecasts for their debt issuance over the four years for $20 billion. So, it’s gone from $126 billion to $146 billion so it’s a pretty material increase.

Ryan Bridge
And what about Australia, how are they looking?

Brad Litt
Australia just released their pre-election update, and they increased their spending for this year about to finish to $100 billion and next year $150 billion, so that’s a pretty large increase circa 2% of GDP. As a kind of comparison, in Germany obviously they’ve got large defence programmes which they’re running now, that’s about 1.5% of GDP, so a pretty material increase there.

Ryan Bridge
Wow. What about the United States – and this is before we even talk about Trump’s Big Beautiful Bill, which is probably gonna have the effect of ramping up borrowing even more. How are they looking?

Brad Litt
So, this bill was only just recently passed, and it’s expected somewhere between $3.3 trillion to $5.3 trillion of debt to be added to the US government. If you think that’s about 7 to 8% of annual deficit of GDP per year over the next 10 years – it’s a pretty material increase. So, the fiscal trajectory is definitely deteriorating.

Ryan Bridge
Yeah, it’s crazy. Remember Elon Musk and DOGE were meant to come in and cut all this spending, but actually as you mentioned earlier it’s really hard. It’s like a drug – you always get addicted to it. They haven’t even really made a dent on what they thought they’d do.

Brad Litt
No, I think it was forecasted initially about $2 trillion of savings. I think recent estimates have been about $150-165 billion, so quite a material decrease from the initial number of $2 trillion, but also relative to the spending that they’re forecasting through for this Big Beautiful Bill that you’ve mentioned.

Ryan Bridge
Yeah. Brad what impact do deficits have on markets? Does it depend what type of deficit we’re talking about?

Brad Litt
Yeah, I mean it depends where they’re at – whether these deficits are considered to be structural or sustainable but, first of all, be higher inflation through increased government spend, crowding out private investment, they increase in demand with no offsetting increase in supply will naturally lead to higher prices and we saw that post the Covid period. Secondly, higher government bond yields – this is obviously a result of additional government bond issuance. Thirdly, depreciating currency and this can depend on whether the deficit is considered to be sustainable or not. Fourth, and we’re probably seeing this with the US more recently, just the burgeoning cost of financing the debt, interest cost and you saw last week one of the rating agencies is lowering the credit rating of the US government. So yeah, and that’s also another potential implication for markets.

Ryan Bridge
It’s like when you get addicted to fast food and you just can’t stop doing it, and then the more you chew through, the more expensive it becomes.

Brad Litt
Yeah, and that’s kind of what we’re feeling in New Zealand at the moment.

Ryan Bridge
Yeah, so let’s talk and finish on New Zealand. So, we’ve got a budget coming this week. We know that the government’s trying to turn our spending track from operational to capital expenditure – that must be welcome news for markets. Is that an important factor for them or what?

Brad Litt
I mean obviously the nature of the spending is important, and they have actually announced quite a few measures – a $9 Billion increase spending in defence. So, that’s supposed to be going to be taken away from other projects which have been listed already. So, yeah in theory it is a good thing, but let’s see how that pans out.

Ryan Bridge
And what about the future for this Big Beautiful Bill? Do you think that will have more of an impact on markets than what the tariff schamozel did?

Brad Litt
Maybe. I mean it’s going to be a different impact on markets. Obviously the tariffs were pretty quick – it was only six, eight weeks ago that Trump was proposing these tariffs and we’ve kind of come back, if you look at most risk markets. Whereas on the tariffs, on the deficit side, that seems like it’s a bit more of a slow burn.

Ryan Bridge
A longer-term issue problem.

Brad Litt
A longer-term issue for sure. I mean the US government hasn’t actually got a reduction in their deficit forecasts until 2028.

Ryan Bridge
Brad, thank you very much for coming in and explaining it all to me. I really appreciate your time.

Brad Litt
Cheers thank you for that.

Ryan Bridge
That was Brad Litt. He’s a Credit Trading Manager at Milford talking about deficits, the different types of borrowing that governments do, the different types of spending that they can do and how that can affect the markets. Don’t forget we’ve got the budget coming up tomorrow here in New Zealand. We’re also going to get a bunch of manufacturing data out of the United States, and we’ll have the Reserve Bank of Australia’s decision on their cash rate.

We’ll see you next week. Don’t forget you can like, follow and subscribe to this podcast wherever you like to. See you then.

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