Soaring debt in richest economies risks slower growth and instability

By Patricia Cohen  For decades crushing debt has spread misery in the world’s poor and lower-income nations. But the menace of unsupportable borrowing that now hangs over the global economy emanates from some of the richest countries.

 

Record or near-record debt in the United States, Britain, France, Italy and Japan threaten to hamstring growth and sow financial instability around the globe.

 

At home, it means countries must make interest payments with money that otherwise could have paid for health care, roads, public housing, technological advances or education. The hunger for more and more loans has also pushed up borrowing costs, gobbling up a bigger share of taxpayer money. It can also push rates on business, consumer and car loans, as well as mortgages and credit cards; and drive up inflation.

 

And perhaps most worrisome, overhanging debt — pumped up even when an economy is relatively sound and jobless rates are low, like the United States — gives governments less room to respond when things sour.

 

“You want to be able to spend big and fast when you need to,” said Ken Rogoff, a Harvard economics professor.

 

What happens if there’s a financial crisis, a pandemic or a war? What if there’s a sudden need for more social services spending and jobless relief because of changes caused by artificial intelligence or climate-related disasters? Borrowing a lot of money quickly becomes more difficult — and expensive — when the national debt is already sky-high.

 

At the World Economic Forum in Davos last week, President Trump commanded center stage, but on the sidelines, finance ministers fretted over their ability to fund a growing list of must-haves, from beefed-up militaries to upgrading electricity grids.

 

Government borrowing when an economy is strong, and when interest rates are low, can support growth, and in times of distress can help bolster spending. The cycle of supercharged borrowing began with the 2008 financial crisis and recession, when governments rushed to provide assistance to struggling households and tax revenues fell. Relief programs during the Covid-19 pandemic, as economies shut down and health care costs rocketed, kicked debt levels up another notch as interest rates were rising and outpacing growth. But debt levels did not decline.

 

Now, in six of the wealthy Group of 7 nations, the national debt equals or exceeds the country’s annual economic output, according to the International Monetary Fund. More and more countries are being squeezed by demographics and slow growth. In Europe, Britain and Japan, aging populations have driven up the government’s health care and pension costs at the same time that the number of workers who provide the necessary tax revenue has shrunk.

 

The need to rebuild infrastructure and invest in advanced technology in many regions is also dire. A yearlong study requested by the European Union’s executive arm concluded that the 27-member bloc needed to spend an additional $900 billion on things like artificial intelligence, a shared energy grid, supercomputing and advanced worker training to effectively compete.

 

In Britain, it will cost at least 300 billion pounds ($410 billion) to upgrade infrastructure over the next decade, according to Future Governance Forum, a think tank in London. Billions more will be needed to revitalize its limping National Health Service.

 

Efforts to trim public spending in Italy, where debt equals 138 percent of gross domestic product, by cutting health care, education and public services, or by raising the retirement age, have set off vehement protests. France, which has been politically deadlocked over the budget for months, saw its sovereign debt rating downgraded last fall, raising questions about the country’s financial stability.

 

Meanwhile, the world has turned more dangerous. Tensions between China and the United States have sharpened. Europe is threatened by an increasingly aggressive Russia and a belligerent American president. Most countries have responded by significantly supporting Ukraine with billions of dollars and increasing military spending. 

High spending

 

• National debt equals or exceeds annual economic output in 6 G-7 nations
• The hunger for loans has pushed up borrowing costs, gobbling up a bigger share of taxpayer money
• Geopolitical tensions and expanding defense commitments drive heavy spending as fiscal buffers thin
• Ageing populations and slow growth shrink tax bases while pension and healthcare obligations surge across Europe and Japan