2023-06-03 05:00:12
After a long period of expansionary fiscal and monetary policies in many OECD countries, governments and central banks want to regain a certain degree of rigor. But when economic policies have been very expansionary for a long time, it is very difficult, if not impossible, to come out of it unscathed. They have in fact become practically irreversible, since the return to more conventional policies would have major drawbacks and could trigger crises. This return to rigor will therefore probably not be implemented.
Between 2010 and 2022, the public debt ratio increased by 19 points in the United States (from 100% to 119% of gross domestic product, GDP), and by 9 points in the euro zone (from 86% to 95% of GDP). Since 2020, these public debt ratios have started to decline, but for an arithmetic reason: the long-term interest rate has been significantly lower than nominal growth (in value), due to the surge in inflation . This reduction will probably disappear in 2024: beyond this date, it will no longer be necessary to rely on inflation to reduce this rate. Stabilizing it will then require eliminating the primary public deficit (excluding interest on the public debt), whereas in 2023, according to government forecasts, it will be around 2 points of GDP at least in the United States. United as in the euro zone.
To reduce the primary deficit, it will therefore be necessary to lower the level of public spending or increase the level of taxes by more than 2 points of GDP, which seems very difficult. Public investment is already at a very low level in the United States and the euro zone (3.1%, compared to 3.5% in 2010 in the euro zone and 4% in the United States), while the energy transition and the relocation of strategic productions will require their increase. In real terms, public spending has increased by 16% in the United States and by 12% in the euro zone since 2017, and this movement will not be reversed due to the additional needs in terms of education, health , research, defence, etc.
Additional loans
As governments and parliaments will probably reject an increase in the tax burden, in the United States as in Europe, it is likely that the public debt ratio, whatever the budgetary rules in place, will not decrease significantly beyond the automatic short-term decline due to inflation. Just as irreversibly, the size of central banks’ balance sheets should not be able to deflate as much as announced. Since the beginning of 2020, with the crisis linked to Covid-19, the balance sheet of the American Federal Reserve (Fed) has increased from 4,000 to 8,500 billion dollars (3,713 to 7,891 billion euros); that of the European Central Bank (ECB) from 3,000 to more than 6,000 billion euros. That’s more than a doubling…
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