The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.
Rapidly growing public debt
Fiscal policy responses to the global
financial crisis (GFC) of 2007-2009, the European financial crisis of
2010-2015 and the COVID-19 crisis of 2020-2021 led to the rapid increase
of public debt-to-GDP ratios in most advanced economies. In most
countries, the gap between both crises (the second half of the 2010s)
was not used to repair fiscal balances and create sufficient room for a
fiscal response to a new downturn.
Table 1 shows that by 2019 only Germany,
Iceland, Ireland, Malta and the Netherlands managed to radically improve
their gross debt-to-GDP ratios (compared to the peaks during the global
and European financial crises), some of them (Germany and Malta) below
their pre-financial crisis levels. Czechia, Denmark and Portugal
recorded a less impressive but still meaningful improvement. Beyond
Europe, the same happened in Israel. Norway, Sweden, Switzerland, and
Taiwan avoided increases in public debt aftermath of the financial
crisis. The euro area and the European Union decreased their relative
indebtedness only marginally.
The outbreak of the COVID-19 pandemic was
marked by rapid deterioration of the debt-to-GDP ratios in almost all
advanced economies except Norway, Sweden, Switzerland and Taiwan. The
IMF World Economic Outlook forecast for 2021 (the last column of Table
1) does not promise much improvement despite the ongoing rapid recovery.
On the contrary, several countries may record a further increase in
In 2020, general government gross debt
exceeded 100% of GDP in 12 advanced economies, including all G7
economies except Germany and will remain above this threshold in 2021.
These are record-high figures for peacetime and are a cause for concern
for public debt sustainability in advanced economies and the stability
of the global economic and financial system.
Public debt sustainability
The public debt dynamic is described by the following equation:
where dt = general government gross debt-to-GDP ratio at the end of period t
= general government...
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