Staggeringly high government debt levels around the globe may stick — a huge shift from previous years that could come despite the warnings of economic damage this dynamic may cause.
Why it matters: Aging populations, worsening partisanship, steepening interest rates and other factors could make it less feasible for governments to reduce their debt — even if they want to.
What they’re saying: “[D]ebt reduction, while desirable in principle, is unlikely in practice,” International Monetary Fund economist Serkan Arslanalp and University of California, Berkeley, professor Barry Eichengreen write in a new paper.
- Ballooning government debt worldwide won’t decline significantly in the coming years as in decades past, they argue. “Countries are going to have to live with this new reality as a semipermanent state.”
Details: The paper, presented Saturday before global central bankers and leading economists at the Kansas City Fed’s Jackson Hole conference, says a collision of new forces will make it difficult to trim debt.
- Demographics: Aging populations mean governments must spend more on health care and pensions.
- Green transition: In the U.S. and elsewhere, governments are ramping up spending to finance the transition to a greener economy.
- Interest rates: Higher borrowing costs mean any growing debt load will get even more expensive to service. (Meanwhile, inflating the debt away is not a “sustainable route to reducing high public debts,” the authors note.)
- Politics: Political polarization and divided government make long-lasting policy arrangements to trim the debt— raising taxes or cutting spending— “even more challenging than in the past,” the authors write.
Of note: Stronger-than-expected economic growth — caused by, say, a larger increase in productivity — could stabilize debt-to-GDP ratios.
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