While consumers have been spending beyond their means for many years, the governments of rich countries are now propping up the world economy with a borrowing spree of their own.
The Economist explains (June 13, 2009) that, “The recession has drained tax revenues and policymakers have been spending unprecedented sums to get their economies going and support their banks. Sovereign debt is piling up.”
International Monetary Fund Issues Debt Warning
In a June 2009 report, the International Monetary Fund (IMF) paints a gloomy picture of the debt situation in the world’s most advanced economies: “The fiscal balances of G-20 advanced countries are projected to weaken by eight percentage points of GDP on average, and government debt is projected to rise by 20 percentage points of GDP in 2008–09, with most of the deterioration occurring in 2009.”
The report adds that by 2010 gross public debt of the ten richest countries will reach 106 percent of Gross Domestic Product. That’s up from 78 percent in 2007, and it will add up to $9 trillion of extra debt in three years. By 2014, in a period of weak economic growth even after the recession ends, the IMF estimates government debt of the rich ten will hit 114 percent of GDP.
Government Deficit Spending may be Necessary
“In the short term,” says the report, “the extra borrowing is prudent: governments must expand their balance sheets to counter the savage pace at which firms and households are cutting back. Were governments not stepping in, the private shift to thrift would be causing an even deeper recession. Tax revenues would fall by more, banks would be even wobblier, and public borrowing might end up even higher.”
However, there is a warning: “(Governments’) huge debts will shape the world economy for a decade.”
More Borrowing Needed to Meet Baby Boomer Entitlements
Meanwhile, another enormous expense is on the horizon as a generation of Baby Boomers, born between 1946 and 1964, grows old. According to the IMF the aging population has a price tag that’s ten times the cost of the current financial crisis. The Economist says, “Left unchecked, demographic pressures will send the combined public debt of the big rich economies towards 200 percent of GDP by 2030.”
According to the article, the present value of the increase in America’s future age-related expenses is about five times its GDP. For Britain, the figure is about three times. And, it cautions that, everywhere the short-term fiscal pain is much smaller than the long-term mess that lies ahead.
Previous Debt Loads were Paid Down
The Second World War pushed Britain’s public-debt ratio to 250 percent of GDP and America’s to more than 100 percent. Both fell sharply in later decades, thanks largely to fast growth.
However, countries were not up against globalization then. And, there are so many nations involved in the economic crisis this time round that recovery is unlikely to come from exports as it did after the war. As well, debt-burdened consumers won’t be pumping up the economy because they need to save more. And, that is expected to prolong slow growth for several years.
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