Government debt is a global problem

Finance ministers and central bankers, gathering in Washington for the annual meetings of the International Monetary Fund, face a global trading system in disarray, uncertainty over the dollar’s standing and the likely course of interest rates, and financial markets that are (for now) unnervingly complacent.

Amid all these challenges, policymakers must pay particular attention to one more: Following years of neglect, public debt has emerged as an increasingly serious risk.

Five years ago, budget deficits soared worldwide because of the pandemic. Lockdowns throttled economic activity and squeezed tax revenue, while public spending surged as governments tried to protect the most vulnerable. Deficits increased from 3.5% of global output in the year before the emergency to 9.5% in 2020. No question, a strong fiscal response was necessary — but, as many argued at the time, it should’ve been reversed in due course. It wasn’t. Even now, deficits are higher than they were in 2019.

Before the pandemic, government debt was 84% of global gross domestic product. It currently stands at 95%. In country after country — including the US, the UK and most of the European Union — it’s on track to keep growing faster than output. By 2030, even if all goes well, the global debt ratio might surpass the level it surged to in 2020, when the fiscal emergency was at its worst.


Public debt, to be clear, isn’t bad in itself, and there’s no fixed ceiling on how high it can safely go. But as it rises, so-called fiscal capacity shrinks, leaving governments less room to maneuver when the next crisis comes around. Eventually, a combination of protracted indiscipline, bad economic news and souring financial markets can dig countries into a hole so deep that the only way out is some form of debt default, either explicit or disguised by high inflation.

Attitudes shifted after the global recession of 2008, and they will need to shift back again. Because the post-crash recovery was so sluggish, “austerity” — the effort to roll back the earlier stimulus — got a bad name. There was talk of “secular stagnation” as interest rates fell to historic lows, which were then thought to be permanent. Cheap money for years to come made bigger deficits affordable. Balance the budget? From now on, public borrowing would pay for itself.

The facts have changed, but this mind-set persists. Most US policymakers have simply stopped caring about ever-rising debt. Elsewhere, governments might pay lip service to the need for discipline — in some cases adopting budget rules or creating “fiscal councils” to address the problem — but their actions have fallen short. If long-term inflation-adjusted interest rates outpace economic growth and drift even higher, debt will keep trending upward and deficits will be ever harder to cut.

That’s all too likely. In the US and Europe, aging populations are raising dependency ratios, pushing revenue down and social spending up. Governments are acknowledging the need for bigger defense outlays. New and better infrastructure is urgently required, including for the clean-energy transition. And coping with the next recession, to say nothing of the next pandemic, is a matter of when, not whether.

The only alternative to an eventual fiscal breakdown is to combine spending restraint with new revenue. First, though, policymakers must understand just how vulnerable their economies have become. It’s way past time for them to rediscover budget discipline — and actually plan to do something about it.