Rich countries are expected to shoulder at least $ 17 billion in additional public debt as they tackle the economic consequences of the pandemic, according to the OECD, while sharp cuts in tax revenues are likely to overshadow stimulus packages to fight the disease.
Across the wealthy OECD club, average government financial commitments are expected to drop from 109% of gross domestic product to over 137% this year, leaving many people in debt with similar public debts at current levels. in Italy.
Additional debt of this magnitude would amount to a minimum of $ 13,000 per person out of the 1.3 billion people living in OECD member countries. Debt levels could further increase if the economic recovery from the pandemic is slower than many economists expect.
Randall Kroszner of the Chicago Booth School of Business and former governor of the Federal Reserve said the situation raised questions about the long-term sustainability of high levels of public and private debt.
“We have to face the harsh reality that we are not going to have a V-shaped recovery,” he said.
The OECD said its members’ public debt increased by 28 percentage points of GDP during the 2008-09 financial crisis, to a total of $ 17 billion. “For 2020, the economic impact of the Covid-19 pandemic is expected to be worse than the great financial crisis,” he said.
Although many governments have introduced additional tax measures this year ranging from 1% of GDP in France and Spain to 6% in the United States, they should be overtaken by the increase in public debt as tax revenues tend to fall even faster than economic activity in the midst of a recession, according to the OECD.
Ten years ago, fashionable economic thought suggested that beyond 90% of GDP, the level of public debt became unsustainable. Although most economists today do not believe that there is such a clear limit, many still believe that letting public debt accumulate more and more would threaten to undermine private sector spending, creating a a brake on growth.
Raising debt levels will become a problem in the future, warned Angel Gurría, Secretary-General of the OECD, although he said countries should not worry about their fiscal situation now in the middle of the crisis.
“We are going to be heavy on the wing because we are trying to fly and we already had a lot of debt and now we are adding more,” he said.
As a result, many other countries are expected to face an economic environment similar to that experienced by Japan since the bursting of its financial bubble in the early 1990s. Since then, concerns about debt and public deficits have been a defining feature of Japan’s political economy, the debt eventually stabilizing at around 240% of GDP under the leadership of the current Prime Minister, Shinzo Abe.
Many politicians and business leaders are alarmed by the new spending plans to fight the pandemic in Japan.
“Our economic strategy uses a considerable amount of money, and honestly, it will be a big budget problem in the future,” said Hiroaki Nakanishi, Hitachi executive president and chief lobbyist of Keidanren’s companies, in a recent interview with the Financial Times. “I don’t have a good plan. Until the economy gets back on its feet, I don’t think there is a sensible answer. “
Purchases of public debt by central banks can help ease the burden by ensuring that the private sector does not have to absorb public assets to finance public budget deficits and by helping to keep interest costs low . Bond yields fall as prices rise.
Advanced economies are already benefiting from extremely low interest costs on their borrowing, as central banks have stepped up their massive asset purchase programs in an attempt to keep inflation well below target, and yields bonds have fallen further in recent weeks.
The United Kingdom raised its debt to negative yields for the first time this week, joining other countries including Germany and France, whose bond yields are also in negative territory.
But, writing recently in the FT, Columbia University visiting professor Willem Buiter said there were limits to the deficits governments could run while being financed by central banks without causing inflation.
Governments could tackle the debt by raising taxes or cutting public spending, but few want to take it after almost a decade of tight public spending. And economists warn that the negative consequences for growth could easily outweigh the benefits.
Again, there are lessons from Japan. Although Abe is known for his economic stimulus, his tenure resulted in two major increases in the consumption tax, from 5% to 8% in 2014 and then to 10% in October of last year. In both cases, higher taxes have pushed the economy into recession.
Adam Posen, director of the Peterson Institute for International Economics, told British parliamentarians this week that it was essential to avoid such actions. “The most important thing is to make the economy grow faster than the debt grows,” he said.
In the absence of a simple solution for advanced economies facing very high levels of public and private debt, Professor Kroszner said that the best policy was the “delicate” art of remission and restructuring of the debt. Done correctly, it could also be in the interest of debt holders who would still lose, but not as much as they would if they clung to the hope that the debts would eventually be repaid, he said. .