Updated Aug 29, 2023 - Economy

Why the world's big debt loads may be here to stay

Illustration of the earth with the land in the shape of a percent sign.

Illustration: Brendan Lynch/Axios

Staggeringly high government debt levels around the globe may stick — a huge shift from previous years that could come despite the warnings of economic damage this dynamic may cause.

Why it matters: Aging populations, worsening partisanship, steepening interest rates and other factors could make it less feasible for governments to reduce their debt — even if they want to.

What they're saying: "[D]ebt reduction, while desirable in principle, is unlikely in practice," International Monetary Fund economist Serkan Arslanalp and University of California, Berkeley, professor Barry Eichengreen write in a new paper.

  • Ballooning government debt worldwide won't decline significantly in the coming years as in decades past, they argue. "Countries are going to have to live with this new reality as a semipermanent state."

Details: The paper, presented Saturday before global central bankers and leading economists at the Kansas City Fed's Jackson Hole conference, says a collision of new forces will make it difficult to trim debt.

  • Demographics: Aging populations mean governments must spend more on health care and pensions.
  • Green transition: In the U.S. and elsewhere, governments are ramping up spending to finance the transition to a greener economy.
  • Interest rates: Higher borrowing costs mean any growing debt load will get even more expensive to service. (Meanwhile, inflating the debt away is not a "sustainable route to reducing high public debts," the authors note.)
  • Politics: Political polarization and divided government make long-lasting policy arrangements to trim the debt— raising taxes or cutting spending— "even more challenging than in the past," the authors write.

Of note: Stronger-than-expected economic growth — caused by, say, a larger increase in productivity — could stabilize debt-to-GDP ratios.

  • But the paper's authors caution that "faster global growth is pleasant to imagine but difficult to engineer," pointing to estimates by the IMF and World Bank that say slower growth is on the horizon.
  • They acknowledge the economic potential of new technologies, including artificial intelligence. However, the adoption required to translate into faster economic growth will take a decade or more.

Where it stands: Global debt ratios have increased, on average, from 40% to 60% of GDP since the 2008 financial crisis, the paper notes. The jump has been even larger for wealthy nations, to nearly 85% of GDP on average.

  • The surge represents bank bailouts, slow economic growth and budget deficits in the years following the financial crisis. Then came COVID-19: The debt pile exploded as governments borrowed big to address the emergency and support constituents.

By the numbers: In the U.S., federal debt held by the public is expected to equal 98% of GDP by the end of 2023.

  • Debt is expected to keep rising in relation to GDP over the next three decades to record levels, according to the Congressional Budget Office — which warned of "far-reaching implications for the fiscal and economic outlook."

The bottom line: A new period of permanently higher debt loads is less dire for many rich nations, including the U.S., where debt is in high demand and still considered safe.

  • "This gives their governments more financial room to run," the authors write.
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