The International Monetary Fund reported that global public debt would rise to 100% of the world gross domestic product in 2020. On an unprecedented level, governments have made huge fiscal expenditures in response to the coronavirus crisis. Their efforts are aimed at mitigating the worldwide economic slowdown.
On a worldwide basis, fiscal expenditures amounted to $11.7 trillion or nearly 12% of global GDP. Borrowing, rather than tax revenues, funded most of these fiscal expenditures.
The IMF projects that the world economy will contract in 2020 by about 4.4%. This is the greatest downturn since the Great Depression.
The U.S. budget deficit tripled to a record $3.1 trillion in the fiscal year that ended Sept. 30. Our budget deficit rose to 16.1% of GDP, the largest increase percentagewise since 1945. Although the Federal deficit totaled 102% of GDP, there is little evidence that the U.S. is approaching the limit of its ability to borrow.
For the most part, the primary borrowers have been advanced economies and large emerging markets. These governments can exploit the historically low interest rates to finance deficits.
The IMF did express reservations about emerging market economies increasing their debt levels. The IMF reported that 54% of low-income countries are in debt distress.
The IMF expects more than 100 million people around the world will fall into extreme poverty as a result of the downturn. The upsurge in destitution will reverse decades of gains.
The IMF encouraged policy makers to focus post-pandemic policies on “tackling poverty and inequality to ensure social peace and sustainable growth.”
In response to rising debt levels, the world’s two major international economic think tanks and lending institutions have different policy prescriptions.
Victor Gaspar, director of IMF’s Fiscal Affairs Department, said, “The fiscal action taken by authorities around the world is unprecedented, and extremely important in avoiding a financial and economic collapse.”
Gaspar expressed the following concerns: “The near-term priority is to avoid premature withdrawal of fiscal support.”
He believes that public investments resulted in an increase in private investments by 2.7%. Such expenditures created between 20 million and 33 million jobs.
The IMF feels that the high debt levels are not currently worrisome. Instead, they advocate continued fiscal expenditures through 2021 to sustain the recovery.
In January, the World Bank published a report critical of the debt build-up. In their biannual Global Economic Prospects, the World Bank wrote, “The history of past waves of debt accumulation tend to have unhappy endings.”
The World Bank warned that historically low interest rates might not be enough to offset another widespread financial meltdown.
Advocates for spending more for public health argue that such policies will enable better methodology for containing the spread of Covid-19. They argue that the world will achieve the following benefits: (1) enjoy safer reopening (2) benefit from a reduction in overall social and fiscal costs.
Fiscal measures include direct spending, tax cuts, loans and guarantees, and direct equity injections. On the monetary side, central banks have cut interest rates and have purchased $7.5 trillion of government and corporate securities.
Policymakers are in a tough spot. We need to undertake policies that will mitigate political and social upheaval. The pandemic has amplified ongoing crises around the world, such as racial inequality protests in the United States, demand for more government spending on social programs in South America, and rising tensions surrounding the ongoing geopolitical standoff between the United States and China.
On the other hand, the high debt levels relative to GDP are troublesome. Today’s low interest costs are a historic aberration. A return to more normal borrowing costs will crowd out our ability to finance the military and social programs undertaken in a modern state.
