According to a report on CNN’s website on July 2, the debt owed by governments around the world has reached an unprecedented $91 trillion, an amount that is almost equal to the size of the global economy and will eventually hit people hard.
The debt burden has become so large – in part due to the losses caused by the epidemic – that it now poses a growing threat to the living standards of people in even wealthy economies, including the United States.
However, in election years around the world, politicians have mostly ignored the problem and are unwilling to talk frankly with voters about the tax increases and spending cuts needed to address the huge debt. In some cases, they have even made profligate promises that will at least push up inflation again and may even trigger a new financial crisis.
The International Monetary Fund warned again last week that the United States’ “chronic fiscal deficit” must be “urgently addressed.” Investors have long been uneasy about the long-term record of the US government’s finances.
“(But) the continued deficit and rising debt burden (now) make this more of a medium-term concern.” Roger Hallam, global head of rates at Vanguard Group, one of the world’s largest asset management companies, told reporters on this website.
As the global debt burden grows, investors are growing anxious.
Political turmoil in France has heightened concerns about the country’s debt, causing bond yields, or the returns investors demand, to soar. The first round of snap elections on June 30 suggests that some of the market’s worst fears may not materialize. But even if the specter of a financial crisis isn’t imminent, investors are demanding higher yields to buy many governments’ bonds as the gap between spending and tax revenues widens.
Higher debt-servicing costs mean less money for critical public services or to respond to crises such as financial collapse, epidemics or wars.
Because government bond yields are used to price other debts such as mortgages, rising yields also mean higher borrowing costs for households and businesses, which will hurt economic growth.
As interest rates rise, private investment falls, and the government’s ability to borrow to respond to an economic downturn weakens.
Karen Dynan, former chief economist of the U.S. Treasury Department and professor at Harvard Kennedy School, said that solving the U.S. debt problem will require either tax increases or cuts in benefits, such as Social Security and Medicare programs.
Harvard University economics professor Kenneth Rogoff also believes that the United States and other countries will have to make painful adjustments to this.
In the United States, the federal government will spend $892 billion on interest payments this fiscal year, more than it earmarks for defense and close to the federal Medicare budget for the elderly and disabled.
Next year, more than $1 trillion will go to interest payments on a national debt of more than $30 trillion, which itself is roughly the size of the U.S. economy, according to the Congressional Budget Office, a fiscal watchdog for Congress.
The CBO projects that U.S. debt will reach 122% of GDP in just 10 years. It projects that by 2054, the debt will reach 166% of GDP, with slower economic growth.
Politicians in the United Kingdom have also adopted an ostrich strategy ahead of the general election on the 4th. The influential think tank, the Institute for Fiscal Studies, condemned the country’s two major political parties for a “silent conspiracy” over the poor state of public finances.
Countries trying to deal with their debt problems are struggling. In Germany, continued infighting over the debt ceiling has put the country’s three-party ruling coalition under great pressure. The political deadlock could reach a climax this month.
In Kenya, the negative impact of trying to deal with the country’s $80 billion debt burden is much more serious. The tax hikes sparked nationwide protests that left 39 people dead and prompted President William Samoy Ruto to announce last week that he would not sign the bill into law.
The risk of a financial crisis in France became a serious concern almost overnight after President Emmanuel Macron called snap elections last month. Investors worry that voters will elect a populist parliament that would favor spending increases and tax cuts, further widening the country’s already high debt and budget deficit.