Sunday, January 05, 2025

More Big changes in the world since Trump 1.0: Government Size, Deficits, Debts

29 Nov 2024 1 month(s) ago 2 Comments

The world is a very different place for investors since the start of Trump’s first term eight years ago. Part 1 highlighted dramatic changes in the shape and distribution of global growth. Today we look at big changes in government spending, deficits and debts. Key outcomes:

      • Governments have expanded in size everywhere – but not in the US or Australia.
      • Budget deficits are worsening almost everywhere.
      • Government debts have ballooned.
      • Likely pressure elevating interest rates and bond yields – in the US and globally.

These big changes in the US and the world mean a new set of challenges for Trump’s second term, and for investors.

(Here is a link to my Report Card on Trump 1.0 -v- Biden, including comments on Trump’s policies for his second term).  

1 – The size of Government has expanded everywhere – except the US!

Government spending has increased everywhere, but that is mostly due to the dramatic return of inflation globally. Even after inflation in each country, government spending in real terms still has expanded everywhere. 

But economies have also grown at the same time, so the best measure is the size of government spending relative to the total economy in each country.

Here is the position in the same selection of countries/regions as in Part 1. The left side of the chart shows general government spending as a proportion of GDP. For each country, the first bar (light blue) is 2016 (immediately before Trump’s first term), and the second bar (dark blue) is the most recent annual or annualised data.

On the left side of the chart, India has by far the smallest government sector relative to its overall economy. But that is half the problem in India – chronic underspending on essential infrastructure to support development and growth.

At the other end of the scale is Europe with the largest government sector. In Europe, the government IS the economy. There is very little room left for business. And the chart shows spending just by national governments. On top of that is all the other layers of government - state, provincial, regional, local governments, and it also doesn’t include the over-arching supra-national European layer of government on top of all that.

For Australia I have included two sets of bars – one for Commonwealth government, and one for all levels of government (Commonwealth, State and local). We can see that our national government spending is the lowest (apart from India) in the world. Even Australia’s government spending across all layers of government is still lower than the national government spending of the other countries (except India).

We may complain about the interference and waste of our government here, but it is a lot worse just about everywhere else in the world!

Changes in the size of government

The right side of the above chart shows the change in the size of government (relative to GDP) from 2016 to now.

The US is a surprising winner here. Despite Trump’s Covid stimulus spending during the first four years, and Biden’s enormous spending spree on a host of massive programs over the past four years, the US economy has grown at even greater rates than government spending, so government spending relative to GDP has actually declined. That is a big tick for the US of A.  

Australia has been the same story – relatively small and declining size of government over the past eight years. In Australia’s case, one contributing factor was that 2016 was a big deficit year in Australia due to poor mineral export revenues in the commodities collapse caused by China’s economic slowdown to 2015.

The other factor in the case of Australia has been the recent couple of years of government surpluses (next section below). So Australia’s starting point (2016) as just bad luck, and the most recent year (2024) was just good luck.

Canada has had a similar effect, but the size of government there is almost on the scale of Europe.

Banana republics (or in our case iron ore, coal, gas) are especially exposed to luck. We have no control over the demand, volumes, or prices of the raw commodities we sell.  

2 – Government deficits are worse everywhere – except in Australia

The second chart shows the government balance – ie budget surplus or deficit outcomes – relative to GDP, in 2016 versus 2024.

The left side shows the levels in 2016 and 2024, and the right side shows the change over the period. Bear in mind that 2016 was well before Covid, so the 2024 figures reflect the new post-Covid philosophy that governments can and should throw money at every possible problem, with little thought of how, when, or who will pay it back some time in the distant future.

The worst performers where the US, which is still running 6% deficits, up from a 3% deficit in 2016.  China and India have also increased their deficits since 2016 and are running large deficits now. In both cases, their problems are not merely cyclical, but are structural and probably terminal, due to their deteriorating demographics. (see Part 1)

Australia scores the only green ticks on the chart.  However, as noted above, the government surpluses in 2024 are the result of windfall minerals revenues from unusually high levels of export volumes and commodities prices (China), and also the 2016 start point deficits were also the result of unusually low export volumes and prices (China slowdown).

So the green ticks for Australia are simply the result of bad luck (2016) turning into good luck (2024). The surpluses in 2023 and 2024 are forecast to return to big deficits from 2024-5 onward, because export prices and volumes have already fallen back.

However, I am not so pessimistic. Treasury and economists are notoriously bad at forecasting anything!

3– Government debts are ballooning everywhere – except in Europe

Government debt to GDP ratios have been worsening almost everywhere:

The right side of the chart is a sea of red – indicating rising debt to GDP ratios. The only exception is Europe, which remains very much a North-South thing: the frugal North (Germany, Austria, Netherlands, Denmark, Sweden, Norway), supporting the profligate ‘PIIGS’ (Greece, Italy, France, Spain, Portugal, but notably Ireland has been the stand-out improver).

Japan still has the highest levels of government debt (to GDP) in the world, and the ratio is still growing rapidly, made worse by economic stagnation – ie debt is still growing but the economy is not.

(Note that these are gross debts. Net debts are often much lower – eg Japan’s net debt is only half the level of gross debts, and is not much higher than the net debt in Italy France or Spain. Gross -v- Net debt is another story for another day!)

Australia’s government debt levels (Commonwealth, and even for all levels of government) remain among the lowest in the world, even after recent governments have used the windfall surpluses to increase spending rather than pay off debt.  

Some implications for investors

This global picture of expanding governments, worsening government deficits, and ballooning debts have several serious implications for investors everywhere:  

  • US government debts are probably going to keep expanding rapidly, putting upward pressure on bond yields, especially if Trump somehow heavies the Fed into keeping cash rates lower than what would be required to kill inflation. A lower cash rate now would mean higher bond yields now and higher cash rates later.
  • Expect a continuation of regular ‘debt ceiling’ crises in the US.
  • Higher US interest rates and bond yields set the pace for the rest of the world.
  • Higher US interest rates and bond yields will also probably support the US dollar, increasing the pressure and likelihood of Trump’s tariffs to assist US industries.
  • In the US, Trump is starting behind the 8-ball with his plans for tax cuts and spending programs to support the re-build American manufacturing. His radical plans to cut government spending by one quarter or one third are probably not going to be achieved.
  • Trump is likely to have some success in cutting red tape and reducing regulation in the US, probably as a focus on cost-cutting in government. This, along with his planned tax cuts, could invigorate US businesses, and perhaps accelerate the global shift for companies and capital back to the US.
  • Governments everywhere have abandoned any notion of ‘fiscal responsibility’ (ie balanced budgets over a cycle). This is likely to fuel inter-generational conflict where ageing populations increase their political clout at the expense of the young who will bear the burden of higher debts.

This will make Trump’s second term all the more interesting and fascinating to watch and navigate investors through!

Please let me know if you agree or disagree on anything!

‘Till next time – happy investing!

Part 1 outlined some big picture changes in the world since the start of Trump’s first term – see

A graph of a number of people with different numbersDescription automatically generated with medium confidence

For a bigger picture on the rise of government, corporate, and household debts in a range of countries, see:

A graph of a chart with different countries/regionsDescription automatically generated with medium confidence

Here is my report card on the main outcomes under the Trump and Biden presidencies, and comments on Trump’s policies for his second term, see:

A screenshot of a screenDescription automatically generated

 

For my current views on asset classes and asset allocations (I am still bullish on US/global shares)- see:

A screenshot of a computerDescription automatically generated

 

A note on data sources: For stats on GDP, government spending, deficits, and debts I use various sources, mainly OECD, World Bank, IMF. RBA and ABS for Australia. St Louis Fed, NBER, BLS for the US. NZ Treasury for New Zealand. Also some secondary sources like Trading Economics.

 

Ashley Owen

 

Please subscribe to my Newsletter, connect on LinkedIn, or follow me on Twitter X 

 

Experiences


Director/Principal, Owen Analytics Pty Ltd (current)

Investment Markets Research & Analytics, Portfolio Construction & Management, Corporate Finance, Venture Capital, M&A, and IPOs. Investment Committee membership, consulting to advice firms and financial institutions.

Co-founder & Regular Contributor, Firstlinks (current)

Co-founder of Australia's leading investment and superannuation newsletter and website for industry professionals and investors.

Non-exec Director, Third Link Investment Managers (current)

Leading Australian equities fund-of-funds that donates all management fees to Australian charities. The fund has donated in excess of $21m to a range of Australian chartities since inception in 2008. 

Chief Investment Officer, Stanford Brown (past)

Responsible for managing over $2 billion AUM in multi-asset class portfolios and discretionary accounts at a privately-owned advice practice.

Director & Joint CEO at Philo Capital Advisers Pty Ltd (past)

Specialises in investment portfolio construction & management, multi-asset class asset allocation, and global macro strategies.

Check out my full bio here

2 Comments

Existing Comments

Hi Howard. Great question! Yes the debt per head is a good way of comparing countries, I often use that, but you need to express it in the local currency of each country, then convert it to a common currency to make it comparable across countries, etc.
The US has two advantages. The first is that the US dollar is the global reserve currency and main currency for global transactions, so they can print as much money as they need to pay interest and repay principal at maturity. The only police are ratings agencies and bond investors.
On ratings agencies - credit downgrades often reduce yields (increase prices and demand, which seems perverse). Eg. US bonds in 2011, also in France, UK, Japan. Bond investors can punish governments -eg Liz Truss in UK in 2022, Clinton in 1994, etc. But most large pension funds have mandates requiring them to buy bonds whether they like it or not. Also the Fed can buy bonds to finance deficits - ie QE.  Despite all of that, I am still bullish on the US dollar medium-long term. It has been the global safe haven since WW1, even when the cause of the crisis is the US itself (eg GFC). It will probably remain the main global currency for many years yet, which should support the demand for US dollars and treasuries.  But it will be an entertaining journey! 

ashley owen
December 02, 2024

Hi Ashley,
Very good article and topical. I think the US per capita national debt is US$85,000 which is a much easier way to understand the magnitude of the problem than saying its national debt is $36 trillion! Difficult to get your mind around that number of noughts!

It beggars belief how the US could cough up that amount of money to meet the principal repayments if the demand for its bonds evaporates – it seems to me it’s actually a huge Ponzi scheme. Anyway what has happened in the past when a country’s fiscal end is nigh is deflation! Doesn’t bare thinking about.

Howard Woolcott
November 29, 2024
 

Leave a Reply

 

“Ashley’s unique fact-based analyses and insights into Australian and global markets are always worth reading. He has an incredibly deep and comprehensive store of financial markets data.”

Chris Cuffe, AO – One of Australia’s best known and most experienced investment managers – former CEO of industry giants Colonial First State, then Challenger Financial; founder and Chair of Australian Philanthropic Services, and Third Link Growth Fund; current/former chair, director and/or investment committee member of numerous funds including UniSuper, Argo Investments, Hearts and Minds Investments, Paul Ramsay Foundation, and many others. Read more.

 

Copyright © 2025 Owen Analytics

About Ashley Owen | Terms and Conditions | Privacy Policy | Archive | Disclaimer

The information contained in this document relates to historical, factual events and returns, and contains general commentary and observations about financial markets, asset classes, and asset allocation. This document, or any part thereof, does not, and is not intended to, constitute investment advice, or financial advice, or financial product advice, in any jurisdiction in which it is published, re-published or read. It does not recommend, encourage, or influence readers to buy, hold, sell, or deal in any financial product or security. Where securities of financial products are mentioned, it is purely for the purposes of illustration, context, and/or education, and not intended to influence anyone to buy, hold, sell, or deal in it. The information is current when written. All reasonable measures are taken to ensure its accuracy at the time of publication, but the author accepts no responsibility or liability for any errors or omissions. This document is only provided to, and intended for, holders of Australian Financial Services Licences. It should not be used or relied upon by any person or entity other than a duly licenced AFSL holder, or authorised representative thereof. The author receives no benefit, financial or otherwise, from any product provider, or product issuer, or any other firm involved directly or indirectly in the provision or services in or to financial markets or industries, whether mentioned in the report or not. Any opinions expressed by the author are his alone, and are intended for the purposes of education.