Title: Irreversible Increase in Global Public Debt Raises Concerns, Researchers Warn
Date: August 26, 2021
Location: Jackson Hole, Wyoming
The steep rise in public debt around the world over the past 15 years, as governments grappled with economic crises, including the Global Financial Crisis and the ongoing COVID-19 pandemic, is likely irreversible, according to a research paper presented at the Kansas City Federal Reserve’s annual central banking symposium in Jackson Hole, Wyoming.
The research paper, authored by economist Serkan Arslanalp from the International Monetary Fund and economics professor Barry Eichengreen from the University of California, Berkeley, argues that public debt loads have skyrocketed from 40% to 60% of GDP, on average, since 2007. Debt-to-GDP ratios are even higher in advanced countries. The United States, the world’s largest economy, now has government debt that exceeds its yearly economic output, compared to 70% of GDP 15 years ago.
Contrary to historical trends, the researchers suggest that reducing debt-to-GDP ratios will be extremely challenging for many economies. They point to factors such as population aging, which will require additional public financing for healthcare and pensions, as well as rising interest rates and political divisions that make achieving budget surpluses difficult.
Moreover, the authors highlight that inflation does little to reduce debt ratios unless it consistently surprises to the upside over a long period. They note that debt restructuring for developing countries has become more elusive as the number of creditors has increased.
In their paper, Arslanalp and Eichengreen argue that high public debts are now a permanent feature of the global economic landscape. They emphasize the need for governments to limit spending, consider tax increases, and improve bank regulations to prevent costly financial crises.
“While this diagnosis may not bring about happiness, it is a realistic one,” the researchers wrote.
It is crucial for policymakers to recognize the challenges associated with high public debt, as they devise strategies to sustain economic growth and financial stability. By implementing prudent fiscal measures, including spending controls and improved fiscal oversight, governments can mitigate the risks posed by mounting debt burdens.