Countries around the world have conspired to borrow more and more money as the costs of dealing with the COVID 19 pandemic pile up.
Public debt is the amount of money that a government has borrowed over the years and still owes. When people talk about the deficit, they mean the amount that the government has spent too much compared to what was brought in each year through taxes.
The U.S. national debt alone for 2020 was about $27 trillion by the end of the fiscal year, with a budget deficit of $3.13 trillion.
The budget deficit was more than three times higher than the deficit of $985 billion last year and more than twice as high as the debt, which had grown to $1.4 trillion in 2009 after the financial crisis.
Other advanced economies are also struggling with increased borrowing. The UK faces a debt of up to £1.87 trillion ($2.45 trillion) by the end of fiscal 2020, which could rise next fiscal year as spending on corona viruses continues to rise.
Most of the U.S. government borrowing was to finance the $2.2 trillion CARES bill, which provided additional unemployment benefits for workers made redundant by the pandemic. It also included incentives for companies to retain workers.
These figures may seem frightening, but here is why most economists agree that public debt is not really an issue at the moment.
The International Monetary Fund (IMF) and the World Bank are among the two institutions that have recommended that governments take out loans in order to get out of the emergency caused by the pandemic.
“Only one thing is important – to be able to dare”.
Kristalina Georgieva, Head of the IMF
The World Bank’s chief economist, Carmen Reinhart, recently told the Financial Times that a high national debt is justified under these circumstances.
“While the disease is raging, what else are you going to do?” she told the newspaper. “First you take care of the war, then you figure out how to pay for it.”
The I.M.F. has also told countries that have access to the financial markets to take on and spend debt without worrying about the prospect of subsequent austerity measures.
Kristalina Georgieva, the chair of the IMF, said on this topic: “Only one thing is important – to be able to dare.
The IMF has so far added up the increase in global spending and tax cuts to $11.7 trillion. That is 12 percent of global GDP in 2020 – a figure that would have been unthinkable a decade ago, when many governments were relying on austerity measures in response to the 2007-8 financial crisis in order to achieve a balanced balance.
Some will ask whether the debt can be written off, but there is currently no mechanism for doing so.
When governments borrow money, they borrow from their citizens and foreign citizens who have money to lend. These people are usually wealthy or middle-aged with savings and are willing to accept government I.O.U.s, often called bonds.
As long as the cost of servicing the debt remains relatively low, governments will not run into major problems while they consider how to repay this debt and they will be able to extend it with relatively few problems.
Depending on how governments act in the future, the debt burden will generally be reduced as economic growth shrinks the mountain of debt relative to national income, taxes are gradually increased and inflation declines.