Pandemic pushes debt to record high

Government debt in the western industrialized countries will remain high for a long time. This is evident from an analysis by the International Monetary Fund, which was published on Wednesday in the biennial Tax Monitor. In that study, global fiscal policy is monitored.

Spending on the pandemic to support business and incomes has pushed government debt up by around 20 percentage points of gross domestic product (GDP) in the developed industrialized countries. That debt is now an average of 121.6 percent.

The expectation is that this percentage will not or hardly decrease in the next five years. In 2026, for example, France’s public debt will be 117 percent, slightly higher than today. In the United Kingdom, too, the debt is still rising, to 112 percent over five years. Most significantly, the US government debt, which has risen sharply to 133 percent of GDP, will remain at that level for the next 5 years. The national debt in China is also rising, to just over 80 percent.

The Netherlands and Germany are the exception with their lower government debt

Germany, on the other hand, is sharply reducing its government debt, to around 60 percent in 2026. According to the IMF, the Netherlands will reduce its debt even further, to 50 percent. But these countries are exceptions.

According to the report, the total debt of governments, households and (non-financial) companies has risen to 226,000 billion dollars (almost 200,000 billion euros) in the pandemic year 2020. That is 27,000 billion more than the year before. Both that level and the increase are a record. Research by the International Institute of Finance, a think tank of the banking sector, shows that this total debt has also risen further this year. Established industrialized countries and China contributed 90 percent to this increase.

The IMF sees the increase in government debt as “fully justified” in light of the emergency that was the pandemic. The fact that government debt will not fall, or will not fall sharply, is the result of persistently high budget deficits, which are often related to support packages for the economy that span years.

Building Back Better

The United States, where President Joe Biden goes by the name Building Back Better, for example, who want to pilot a major plan through Congress, will still have a budget deficit of 5.3 percent of GDP in 5 years’ time. The IMF estimates that these kinds of economic support measures already published in the EU and the US could contribute $4.6 trillion to GDP over the next five years. This does not even include new budgetary impulses.

The situation is different in low-income countries, where the debt has risen less, government support was limited during the pandemic and the possibilities to roll out vaccines in the coming period are limited. These countries, as well as emerging countries, run the risk that rising interest rates or falling exchange rates will already make the interest and repayment of existing debt more difficult, and it more difficult to take on new debt.

Victor Gaspard, the IMF’s director of budgetary affairs, pointed out on Wednesday the need to continue to support countries that are struggling to borrow themselves. A restructuring of these countries’ debts to make them bearable again is therefore not ruled out by the International Monetary Fund in the near future.

Pandemic pushes debt to record high
Source link Pandemic pushes debt to record high

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