Debt on the Rise: Learn about Global Debt Trends and Economic Vulnerabilities
The level of public debt persisted despite the economic recovery that began in 2020 and the significantly higher-than-expected inflation rate. While many governments halted pandemic-related fiscal support, they continued to spend more to spur the economy and respond to surges in the prices of food and energy, which resulted in fiscal deficits that maintained the levels of public debt.
According to data from the International Monetary Fund’s (IMF) Global Debt Database, global debt hit a record of $303 trillion in 2021, a further increase from the record of $226 trillion in 2020. The IMF claims this was the largest debt increase in a single year since World War II.
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China’s overall debt of $47.5 trillion is still significantly less than that of the United States, which is close to $70 trillion. However, debt as a percentage of GDP has increased to around the same level as that of the United States. Regarding corporate non-financial debt, China holds the highest percentage globally, at 28 percent.
Tackling Vulnerabilities Amidst Global Debt
To assist in lowering debt risks and reversing long-term debt trends, governments should act quickly. Policies about private sector debt may involve close observation of the debt loads of individuals and non-financial corporations, as well as any associated dangers to financial stability.
Creating a solid fiscal framework could serve as a roadmap for balancing the needs for spending and the sustainability of the debt when it comes to public debt risks.
It is crucial to increase the ability to levy additional taxes in low-income developing nations. Reducing debt loads is crucial since it will free up funds and permit new investments, which will support economic expansion in the years to come.
That objective would be supported by labor and product market reforms that increase potential output at the national level. Further easing of the strain on public finances could come from international collaboration on taxation, particularly carbon taxes.
We predict that by 2030, absolute debt will have increased from $225 trillion in 2023 to $336 trillion, a half-trillion increase. Without inflation, total debt would have increased by only 10% to $247 trillion (in 2023 dollars).
Given the effects of high-interest rates, a decline in M&A activity, and increased financial risk aversion on the part of corporate management, it is not expected that corporate borrowing will increase significantly between 2024 and 2025. The corporate debt-to-GDP ratio will rise between 2026 and 2030 due to both investors’ return to risk-taking and more moderate borrowing prices.
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The need for governments to accelerate fiscal consolidation will become essential to maintaining current levels of creditworthiness, especially if we include other factors like an aging population, climate mitigation and adaptation, and technological challenges that are likely to increase pressure on government balance sheets. However, governments will probably prioritize spending, just as they are already doing with the energy transition and challenges associated with aging.
Climate and Digital Transition Costs
Ignorance of climate change comes at a high cost. In the event of a delayed transition and a lack of adaptation, lower- and lower-middle-income nations could lose up to 12% of their GDP due to physical hazards by 2050.
In the meantime, developing economies have significantly different challenges in terms of energy security, affordability, and sustainability than developed nations like the US and Europe, where per capita incomes can be up to 40 times greater. In terms of society, a growing number of nations are dealing with an aging population, which may impede future economic expansion.
Finance for climate change accounts for the highest portion of debt for transition. Between 2024 and 2030, it may be necessary to raise an estimated $37 trillion in debt, of which $25 trillion is related to the environment, $7 trillion to digital transformation, and $5 trillion to aging.
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According to estimates, worldwide borrowers pay $9 trillion in interest costs annually, which is 50% more than the $6 trillion they will pay in 2019.
Conclusion
The biggest casualties will probably be the governments. The worldwide interest expense-to-revenue ratio is predicted to be 17% greater in 2030 than it was in the pre-COVID 2019 period, despite an anticipated decrease in interest rates.
The household sector is anticipated to see the least change in its interest expense-to-revenue ratio throughout the 2023–2030 timeframe, in part because of a predicted 1% increase in leverage ratios. In the center is the corporate sector.
Our cost of transition scenario results in worse ratios because we expect governments to pay the majority of the costs associated with the aging population, digital transformation, and climate change.
