The Fiscal Monitor, a yearly report issued by the International Monetary Fund (IMF) has found that at the end of the Fourth Quarter 2020, global debt reached $226 trillion, an increase of $27 trillion from the previous year, and equal to twice that of global gross domestic product.
Likewise, global government debt is expected to remain at record-high levels—close to, but below, 100% of GDP—in 2021. Last year, the issuance of federally-created money to U.S. citizens and businesses to ease the pain of government-mandated lockdowns, drove federal spending rates to double the rates of taxation, while the total debt reached 100% of the nation’s gross domestic product.
In short the world owes the world more than the world has, and a microcosm of that can be seen domestically.
The IMF point out that a trident formed by the need for large purchases of government debt by central and domestic banks, vaccine hoarding and approvals of boosters, and the impacted production of consumer goods and raw materials—the backbone of emerging markets, aim to pierce the hopes of rapid recovery in low-income developing nations.
For the world’s principle markets and economies, the IMF sums up the challenge of the post-pandemic world in their report’s executive summary…
Returning to pre-pandemic debt levels, for example, would require achieving, for more than a decade, larger primary fiscal balances than before the pandemic—a task made difficult not only by crisis-related spending, but also preexisting pressures from aging populations or development needs, and resistance to raising [tax] revenues.
In the world’s largest economies, only four central banks hold interest rates higher than 1%: Brazil and Russia at around 6.5%, and India and China at around 4%. While this allows for accommodating large government deficits, it acts largely to the detriment of fiscal responsibility and drives down the rates of public savings, diminishing long term financing prospects.
With global debt higher than global GDP, and U.S. debt higher than U.S. GDP, the IMF imagines that greater fiscal transparency and repeated accordance to stated objectives and rules are the best ways to curb the spiraling public borrowing rates.
“To commit to future deficit reduction, governments have several instruments, including undertaking structural fiscal reforms (such as pension reform or subsidies reform), pre-legislating changes to taxes or spending, committing to fiscal rules that lead to deficit reduction in the future,” reads the report. “Countries that follow debt rules, for instance, manage to reduce debt faster that other countries”.
“Overall, governments that commit to sound public finances and that achieve high levels of fiscal transparency reap meaningful benefits: their budgets are more credible, their announcements are better perceived by the media, and they pay lower interest rates on their debt”.