Damien Grant: There’s no path to electoral power that can accommodate running a balanced budget

Sunday, 1 June 2025

We have a demographic bubble where the population pyramid is inverting while the debt burden is expanding with a shrinking base of the employed to cover the costs, writes Damien Grant.

Damien Grant is an Auckland business owner and a regular opinion contributor for Stuff, writing from a libertarian perspective.

OPINION: Last month the ratings agency, Moody’s, dropped the US credit rating from Aaa to Aa1. This followed similar downgrades from the other large firms, Fitch and Standard and Poor’s, who made similar calls in 2023 and 2011 respectively.

Now. The failure of these agencies to spot Enron, Lehman Brothers, or indeed the insolvency of mortgage-backed securities that propped up the pre GFC economy makes them as reliable as chicken entrails when it comes to picking trends. But still. Let’s look at what is behind these decisions.

Donald the Magnificent has proposed a budget with, in simple terms, $4.9 trillion in revenue against $6.8 trillion in spending. His projected deficit is over 6% of America’s GDP; a divergence from fiscal prudence so extreme that D emocrats are recoiling.

Once such gentlemen, the unknown congressman from Virginia, Bobby Scott, grumbled to the House: “ It’s frankly hard to take my colleagues on the other side of the aisle serious when they come up here and give speech after speech complaining about the deficit and then support this resolution that what? Increases the deficit!”

Even Elon Musk, the president’s greatest cheerleader, appears to be suffering from buyer’s regret, expressing disappointment that the spending provisions have wiped out whatever contributions his Department of Government Efficiency has achieved.

Finance Minister Nicola Willis says every minister helped find Budget savings and described ACT’s $115m annual contribution as a “small portion” of the $5.3b total. “Every little bit counts.”

Trump isn’t unusual in his inability or unwillingness to control spending. Nations within the Eurozone consistently fail to keep deficits to within the mandated 3% of GDP and 60% debt to GDP ratio, while the United Kingdom has abandoned fiscal responsibility with a deficit over five percent of its GDP.

Meanwhile, the Australians managed a brief return to surplus in recent years thanks to admirable fiscal restraint but have slipped quickly back into deficit for the foreseeable future.

And that appears to be the problem. Democracy.

The change occurred about two decades back, in the west, when the constituency for fiscal responsibility was lost. This isn’t political because it doesn’t matter who is in charge.

There is no path to electoral power that can accommodate running a balanced budget. Even those who are term-limited out, such as Mr Trump, are unable or unwilling to pay the political price of attempting to address the structural deficits that are now part almost all OECD nations.

Compounding the dilemma is a demographic decline in native-born populations; which some countries such as ours are resolving with migration, while others are pretending isn’t occurring.

But migration isn’t a viable solution in an increasingly transient world. If someone has the desired skills to migrate they can easily depart. Which they may do when they discover their residential status comes with an obligation to contribute to the welfare of those through age, illness or temperament, are not participating in the labour market.

And as the sense of national identity consequently weakens, why should we worry about the long-term fiscal viability of a nation that we are not committed to?

A democratic system rewards the politician who promises a better today without explaining that the cost is an impoverished tomorrow, for tomorrow they will be off giving opening speeches at Yale or enjoying the generous stipend for running a domestic university.

What is less clear is how this unsustainable economic malaise resolves itself; because it cannot continue. With each passing year the cost of servicing the debt compounds and the number of workers to retirees falls. There is an inevitable destination, which is why rating agencies like Moody’s are beginning to downgrade sovereign debt. The risk of default.

The problem builds on itself. As the risk of default rises, lenders demand a higher interest rate to compensate for that risk. And this has been occurring with interest costs on long-term sovereign debt bonds beginning to tick up. As these rates rise governments must either tax more, cut spending, or raise more debt.

But if our electoral system precludes raising taxes or cutting spending, then the only path is increasing the debt burden, which raises the risk of default and thus the interest cost; and so on.

So. We have a demographic bubble where the population pyramid is inverting while the debt burden is expanding with a shrinking base of the employed to cover the costs. We will default.

Practically, this will be inflation, which allows a central bank to print more money to cover the bills from yesterday. This is effectively a tax imposed on the poor who are unable to index their way out of harm’s way, or those whose primary financial asset is denominated in the local currency.

And to find a precedent for this behaviour we do not need to look back to the Great Depression or the feckless 70s. We did precisely that a few years back when central governments needed to expand budgets to cope with the lockdowns and paid for this with printed money and a debasement of the currency.

The Moody’s downgrade is a small flashing red-light that we will ignore until the train derails, with only our devalued currency to soften the impact.

* CORRECTION: An earlier version of this article said Australia hadn’t had a budget surplus since 2007. The country had a surplus in both 2023 and 2024. (Amended: June 1, 2025, 8.11am.)