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Expansion of Government Debt

Government debt has exploded over the past year with the need to provide support to both businesses and individuals hard hit by the Covid-19 virus.

Advanced economies’ debt has grown by over 25% to an average of over 120% of GDP (higher than after World War 2).

Global economies (including emerging countries) total debt level is slightly lower at 102% of GDP. Fortunately, the interest rate required to raise capital during this past year has been at historically low levels (i.e. less than 1% per annum).

To add further concern, this does not include "off balance sheet" obligations such as Medicare and Old Age Pensions (in the USA for example). This, however, does not mitigate the threat to global economies in the long term. There now will be enormous pressure by both Central banks and central governments to keep interest rates "lower for longer."

However, should there be unforeseen economic shocks such as stronger than expected GDP growth leading to inflationary pressure, this will inevitably lead to higher interest rates to combat inflation which in turn will put pressure on central governments to meet their long term debt repayment demands. At the other end of the spectrum, slower than anticipated growth will lead to lower tax revenue by governments which also puts strains on their ability to meet debt repayments.

While almost no one is paying much attention to this issue at present in lieu of concerns in front of our face, this can present a significant risk to global economies should we encounter either too strong or too weak economic growth in the future. Most mainstream economists do not view this as a major "systemic”risk, although these same economists seldom stray from "normalized" economic returns. Financing does matter. An individual can not manage their household and a corporation can not manage their balance sheets carrying excess debt for prolonged periods of time. Governments, while they do have the ability to raise taxes or "print money" through their Central banks nonetheless are faced with similar challenges. Weak economic growth like the 1930's or strong inflationary growth like the 1970s will create major obstacles for governments globally in future. At some point, hopefully not too far in the future, citizens should pressure their governments to focus on reining in spending to protect future generations.


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