Rising Government Debt – Do we need to worry?

Government debt levels have risen substantially on a global scale and most countries do not show any signs of a trend reversal in the foreseeable future.

Bernd Weidensteiner, Dr. Christoph Balz

Commerzbank Economic Research

July 5 2024

Fiscal policymakers face various challenges and oftentimes there is a lack of political will to cut overall spending and begin prioritizing expenditures. Many rely on the central bank's will and ability to stop another debt crisis should push come to shove. However, such a rescue would not come without cost and instead lead to increased inflation.

Debt ratios have risen considerably since the Financial Crisis ...

In many countries sovereign debt levels have shot up following the Global Financial Crisis in 2007. In the US, the debt-to-GDP ratio has almost doubled, rising from 65% to 122%. Similarly, France saw its debt-to-GDP ratio rise from 65% to 111%. As a consequence, the ratings agency S&P recently adjusted the country's credit rating downwards.

... and a trend reversal is not in sight, ...

In the upcoming years, a continuation of this almost universal upwards trend is likely. It seems, the consolidation of the fiscal budget is simply not a priority for policymakers everywhere. More than that, multiple countries such as France are even setting the stage for additional costly expenditure plans or tax reductions. In the current election campaign in France, none of the parties have even so much as mentioned plans to tackle the deficit.

... also considering higher interest rates and less inflation

The lack of political awareness could be traced back to the benign borrowing environment during more than a decade of historically low interest rates. When credit is cheap, additional debt has no noticeable impact on the budget. In addition, high rates of inflation generated faster nominal GDP growth, in turn curbing the rise of the debt ratio.

Nonetheless, tailwinds for the public finance situation are losing their force. Inflation has cooled down while higher interest rates are weighing heavily on the budgets. The direct consequences of outsized sovereign debt volumes become visible when considering the large sums of interest rate payments governments are due to pay out to their lenders. For example, in fiscal 2024, the US federal government's interest payments as a percentage of GDP are expected to amount to 3.1%. This represents a doubling compared to the early 21st century. In the coming years, this ratio is set to rise to 4%.

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