Governments worldwide are grappling with an unprecedented $91 trillion in debt, almost equivalent to the global economy’s size. This alarming debt burden, partly due to the COVID-19 pandemic, poses significant risks to living standards, even in wealthy nations like the United States. Yet, as election season heats up globally, politicians largely sidestepped the issue, avoiding the tough conversations about the necessary tax increases and spending cuts required to manage this massive debt.
The International Monetary Fund (IMF) recently underscored the urgency of addressing chronic fiscal deficits in the U.S., warning that continuing deficits and a rising debt burden are now pressing concerns. Investors, growing increasingly anxious about the long-term trajectory of government finances, echo this sentiment. In France, political turmoil has further exacerbated debt concerns, driving bond yields higher as investors demand greater returns for the increased risk.
The financial impact of soaring debt is profound. For instance, the U.S. federal government is projected to spend $892 billion on interest payments in the current fiscal year, surpassing defence spending and approaching the Medicare budget. We expect interest payments to surpass $1 trillion next year, a stark reminder of the burden debt servicing places on national finances. As interest rates rise, the cost of borrowing escalates, reducing funds available for crucial public services and making it harder for governments to respond to crises like financial meltdowns or pandemics.
Despite these mounting concerns, political leaders in major economies like the U.S. and the U.K. remain reluctant to address the debt crisis head-on. President Joe Biden and former President Donald Trump in the U.S. have faced accusations of exacerbating the debt situation through tax cuts and increased spending, respectively. Meanwhile, in the U.K., the Institute for Fiscal Studies has criticised the main political parties for their “conspiracy of silence” regarding public finances before the general election.
Financial markets are increasingly jittery about rising debt levels. Higher government bond yields, driven by investor demands for greater returns, translate into higher borrowing costs for households and businesses, which can stifle economic growth. The U.K. experienced a stark reminder of this in 2022 when former Prime Minister Liz Truss’s tax cut plans, funded by borrowing, led to a collapse in the pound.
Countries worldwide are struggling to tackle their debt issues. Germany is facing political strife over debt limits, while Kenya’s proposed tax hikes to address its $80 billion debt have sparked deadly protests. These examples highlight the global nature of the debt crisis and the political and social challenges.
Addressing the global debt crisis will require difficult decisions and political will. As Harvard professor Kenneth Rogoff points out, the era of low interest rates that made debt seem manageable is over. Governments must now confront the reality that debt is not free and that failure to manage it could lead to severe economic consequences.
The coming years will be crucial as governments either take the necessary steps to manage their debt or face potentially dire economic and social consequences. As political leaders avoid addressing these challenges head-on, the risk of financial markets imposing harsh discipline grows, underscoring the need for proactive fiscal management and political courage.
