The research and discussions surrounding the rise in sovereign debt levels are numerous and complex, as they have become an increasing concern in many countries, especially following the outbreak of the COVID-19 pandemic, which significantly increased sovereign debts due to government aid provided to families and businesses. The World Bank estimates in its recent "Global Economic Outlook" report that the situation is expected to worsen due to projections of weak global economic growth in the medium term and increasing spending pressures to address challenges such as climate change and aging populations. This also means they have less flexibility in responding to future crises and protecting financial stability. Some economies, particularly low-income countries, are already suffering from debt distress. These challenges raise important questions about fiscal policy and sovereign debt. The World Bank report indicates that despite improved short-term growth projections, global outlooks remain bleak by historical standards. During the 2024-2025 period, growth performance is expected to decline from the average seen in 2010 in about 60% of economies with over 80% of the world's population. Public debt is estimated to reach around 93% of global GDP in the first quarter of 2024 and is expected to rise to approximately 100% of GDP by 2029. In the United States, China, and Japan, public debt ratios are anticipated to reach 133%, 106%, and 251% respectively by 2028. The rising debt in an environment of increasing interest rates means higher debt service costs, which limits fiscal space. The landscape is dominated by the risks of negative developments, particularly geopolitical tensions, fragmentation of trade activities, prolonged high interest rates, and climate-related disasters. Therefore, international cooperation is essential to protect trade, support green and digital transitions, alleviate debt burdens, and improve food security. In emerging markets and developing economies, public investments can enhance productivity and stimulate private sector investments, encouraging long-term growth. Comprehensive reforms of public finance are crucial to address ongoing challenges faced by small countries, especially due to heightened exposure to external shocks. Kenji Okamura, Deputy Director of the International Monetary Fund, questions what makes a debt reduction plan sustainable and how can governments commit to ambitious yet credible adaptation plans.
American debt levels are expected to grow over the next five years and beyond, potentially leading to long-term interest rate rises that could be felt internationally through financial channels. While growth could help, in light of the broad and significant productivity slowdown, this becomes less likely in the coming years. For most countries, reducing debt means making tough choices to narrow budget deficits - so building public support for these efforts will be vital. World Bank research has shown that credible medium-term public finance frameworks and strong oversight from independent financial institutions can assist in this regard. Public finance rules could also help stabilize expectations regarding the future path of fiscal policy. The willingness to take risks may also transfer from financial centers, potentially harming global growth and investment. This could make sustainable fiscal paths in many regions of the world unsustainable. Policymakers must be prepared to meet this challenge by strengthening their policies and financial frameworks. As illustrated in the Fiscal Monitor report published in April 2024, tightening fiscal policy in the United States could also help reduce indirect effects on other countries through financial channels. Growth could help, but with the broad and significant productivity slowdown, this becomes less likely in the coming years. For most countries, reducing debt means making tough budgetary choices - therefore building public support for these efforts will be critical. Strong oversight from independent financial institutions can aid in this regard. Public finance rules could also help stabilize expectations regarding the future path of fiscal policy.
The US public debt continues to play a unique role as a global safe asset, granting the US government a financing advantage. However, these "exorbitant" privileges may erode. The comfort yield is beneficial to the issuer but is derived from the service provided by state commitments to the global financial system. With doubts emerging regarding the issuer's creditworthiness due to excessive debt, the financing advantage diminishes. For emerging market economies and developing nations, sovereign liquidity risks and default risks are interlinked. Questions concerning who holds the debt, the composition of the debt, and debt sustainability are critically important. In conclusion, I suggest that governments prepare a budget for current expenditures and another for capital expenditures, considering that capital expenditures should be matched by assets for the economy.
