The writer is a global economist and the author most recently of ‘Edge of Chaos’
A critical issue policymakers need to address urgently is the amount of debt plaguing the UK, the US and the global economy, and the impact the growing status of China as creditor to both the west and the developing world will have on that.
The IMF and World Bank have urged economies to access financial markets to borrow high during the pandemic. Kristalina Georgieva, head of the IMF, has said, “Only one thing matters — to be able to dare”. But the debt picture is precarious. The global debt to gross domestic product ratio is unsustainable, at over 320 per cent. Perhaps more worrying is that China’s role as a creditor now means debt concerns are not just economic, but also geopolitical. China is one of the top lenders to the US — which gives the country’s political class enormous leverage — and also now the largest lender to emerging economies.
Strained US-China relations, and the fact that China is also the largest trading partner and foreign direct investor for many advanced and developing countries, will limit the scope for negotiations to restructure or even a call for debt moratoriums. This strengthens Beijing’s position in setting trade terms. A debt stand-off between the US and China would have considerable contagion effects around the world, as US government treasuries remain the risk-free reference rate for most debt issuers.
Even before the pandemic hit in earnest, economists and policymakers had expressed concern over unsustainable debt. For example, in March 2019 the UK Office for Budget Responsibility warned that the ageing population and Brexit would put increasing upward pressure on spending, and reduce the chances that the government could reach its aim of balancing the budget by 2025-2026.
Meanwhile, the Congressional Budget Office has cautioned that in 2030 the US fiscal position will be extremely challenged, with the projected federal deficit reaching 5.4 per cent, against an average of 1.5 per cent over much of the past 50 years, largely due to healthcare and social security obligations.
In the wake of Covid-19 health and economic concerns, the debt-to-GDP ratio in the UK and US has surged to over 100 per cent, which is set to drag on future economic growth. In the UK, at the beginning of 2020 UK households had borrowed roughly £1.7tn — almost as much as the government. And every class of debt in the US — government, household, credit card, auto loans and student loans — has surged to over $1tn each, and almost 20 per cent of US companies are seen as zombies.
The UK does have some space to manoeuvre. It retains the confidence of the debt markets, with 10-year gilts trading at just 0.25 per cent compared with 0.75 per cent in January. And, with an average maturity of almost 20 years, there is no immediate repayment pressure. Also, expectations are that interest rates in the UK will remain low for some time, so servicing debt will be cheaper.
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Globally, many conventional ways to manage excess debt — including GDP growth, fiscal spending cuts, bailouts or printing money — are out of reach. With IMF global growth projections at minus 4.4 per cent in 2020, simply growing out of the debt quandary seems unlikely. Meanwhile, with historically low interest rates in many developed economies, and central bank balance sheets still stretched by the 2008 financial crisis, there is little scope to use further monetary policy tools to tackle debt.
At a time when governments do not have much room to reduce public spending, policymakers will need to act quickly and deftly to avoid future debt crises, and outright default scenarios. They may be pushed to consider aggressive options, such as threats of default that would force lenders to the negotiating table. Their ability to address urgent concerns such as climate change will be limited. This would be devastating to the global economy, and to the prospects for human progress.
This article has been amended since original publication to reflect that UK household borrowing at the beginning of 2020 was roughly £1.7tn
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