Rich countries are set to take on at least $17tn of extra public debt as they battle the economic consequences of the pandemic, according to the OECD, as sharp drops in tax revenues are expected to dwarf the stimulus measures put in place to battle the disease.
Across the OECD club of rich countries, average government financial liabilities are expected to rise from 109 per cent of gross domestic product to more than 137 per cent this year, leaving many with public debt burdens similar to the level in Italy.Additional debt of that scale would amount to a minimum of $13,000 per person across the 1.3bn people that live in OECD member countries. Debt levels could rise even further if the economic recovery from the pandemic is slower than many economists hope.
The OECD said that public debt among its members rose by 28 percentage points of GDP in the financial crisis of 2008-09, totaling $17tn. “For 2020, the economic impact of the Covid-19 pandemic is expected to be worse than the great financial crisis,” it said.
While many nations have introduced additional fiscal measures this year, ranging from 1 per cent of GDP in France and Spain to 6 per cent in the US, they are likely to be outpaced by the rise in public debt because tax revenues tend to fall even faster than economic activity in a deep recession, said the OECD.
A decade ago, economic thinking suggested that beyond 90 per cent of GDP, government debt levels became unsustainable. Although most economists do not now believe there is such a clear limit, many still think that allowing public debt to build ever higher would threaten to undermine private sector spending, creating a drag on growth.
Rising debt levels will become a problem in future, Angel Gurría, OECD secretary-general, has warned, although he said that countries should not worry about their fiscal positions now in the middle of the crisis.
“We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more,” he said.
As a result, many more countries will face an economic environment similar to that experienced by Japan since its financial bubble burst in the early 1990s. Concern about government debt and deficits has been a defining feature of Japan’s political economy ever since, with debt eventually stabilizing at about 240 per cent of GDP under Shinzo Abe.
Many politicians and business leaders are alarmed by the fresh spending packages to tackle the pandemic in Japan.
Central banks’ purchases of government debt can help lighten the load by ensuring the private sector does not have to soak up public assets to finance government budget deficits and helping to keep interest costs low. Bond yields fall as prices rise.
Advanced economies already benefit from extremely low interest costs on their borrowing as central banks have stepped up programs to purchase assets in huge quantities in an effort to keep inflation from falling far below their targets, and bond yields have fallen further in recent weeks.
Governments could tackle debt by raising taxes or cutting public spending, but few want to go down that route after nearly a decade of tightening public spending. And economists warn the negative consequences for growth could easily outweigh the benefits.
Original source: Financial Times