Chart of the Week: Their Law

Clients are continuing to ask about the likely impact of Donald Trump’s policies on the global economy. Last week we discussed tariffs, and this week we’re looking at the interplay between US government debt and deregulation.

The issues of ballooning government debt and the inefficiencies of overregulation are often treated as separate, but they are intertwined. The links are particularly deep when it comes to public sector (government) spending and private sector (business) growth.

Debt: the cost of doing business as usual

The budget balance is the difference between the money a government earns (through taxes and other revenue) and the money it spends. The US government typically spends more than it earns, creating a budget deficit that is pushing up the national debt. In his previous term, Trump contributed heavily to this, with tax cuts and increased spending driving the national debt to historic levels, and it rose further still under the Biden administration. While these policies aimed to stimulate growth, they came at a high cost. Interest payments on the national debt hit $1 trillion this year, and this constrains the government's ability to invest in critical areas like infrastructure and education.

Regulation: a heavy weight on private sector growth

The US needs economic growth, which will increase tax revenues – narrowing the deficit and helping the country pay off its debt. However, regulation can act as a drag on business growth. And, as the chart below shows, federal government agencies have been busily introducing new regulations at a rate of around 3,000 a year. This dwarfs the number of new laws passed by Congress.

Consider California's experience as a cautionary tale. Since 2022, the state has added over 361,000 public sector jobs, while businesses, including large technology companies, have shed 154,000 jobs.

Regulatory complexity, high taxes and other costs have pushed businesses to relocate, leaving the public sector to fill the employment gap. Ironically, these public sector jobs are reliant on funding by the very taxpayers who are fleeing the state in search of better opportunities.

This trend underscores how overregulation can compound government debt. Excessive rules slow business growth, leading to lower tax revenues and forcing the government to borrow more to sustain public services. If a government simplifies rules successfully, it can encourage entrepreneurship, attract investment and ultimately expand the tax base – a virtuous cycle that reduces the debt burden while boosting economic dynamism.

DOGE: getting the balance right?

This is where the newly created Department of Government Efficiency (DOGE), which is being headed up by Elon Musk, could theoretically come into play. By streamlining government and public sector operations, and reducing wasteful spending, the US could lower its debt burden, while freeing up resources to stimulate private sector investment. However, history shows that achieving this balance is easier said than done.

The interplay between debt and regulation is a delicate balancing act. High government spending is often a symptom of economic inefficiency. However, cutting corners without strategic reforms risks undermining essential services. The key is not simply spending less but spending smarter, using reforms like those envisioned by DOGE to build a foundation for sustainable growth. Governments around the world will be watching to see if the US can use this approach to help to successfully navigate a path to lower debt and increased growth.

In the end, economic efficiency is not just about saving money – it is about ensuring the government is a partner, not a barrier, to business success.

Key takeaway: working in partnership is a great way to achieve your goals, which is something we are passionate about.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.