The coronavirus pandemic has given rise to massive global debt. Even the most stable and resilient countries are today facing a crisis. Both governments and businesses have borrowed highly to help sustain their economies and support their citizens. There has been significant financial, social, and economic damage due to the lockdowns and restrictions.
Global debt, however, has now existed for a while now. The United Kingdom alone has been burdened with high debt even before the pandemic hit. Almost all of Europe, except Germany, has witnessed budget deficits that governments have not been able to handle. However, the U.K. government has been trying hard to help the economy and its people survive by protecting them from unemployment, default, and bankruptcy. A similar situation exists in the United States.
Austerity – The Doomed Word: Why and How?
The last cycle during the pandemic was overshadowed by austerity. Austerity, in simple language, means the difficult economic situation that the government creates to reduce public expenditure. The word is feared by many, especially in the UK and in several other European countries, because of the impact austerity has had on people’s daily lives. European economies have struggled to recover as the policies that were followed were far from result-oriented. Central banks gave money with one hand and the governments took it away with the other. It seems as though this is a cycle the is set to continue.
Only a solid financial system and the finance minister can try to balance out the country’s budget in the coming few years and overcome the ill effects caused to the economy by the coronavirus pandemic. This might also happen in Europe and the United States by means of raising taxes while considering fairness, equality, and redistribution of income. Capital gains, marginal income tax rates will also play a significant role in paying down the global debt.
The U.K. Chancellor has declared a rise in corporate taxes, starting in the year 2023. The future also holds a possibility for an increase in the capital gains and inheritance taxes, including an online sales tax.
Is Cheap Debt the Solution to Global Debt?
Cheap debt is basically the money we borrow to pay back the debt at a lower rate. Currently, the U.K. is able to borrow long-term below 1%; the US can do the same below 2% and reinvest money into their respective economies. With some inflation and growth faster than this rate, the borrowing cost will be absorbed with the debt ratio falling to an acceptable level without increasing taxes.
The U.S. debt is 1% of the GDP right now and is expected to double over the next 10 years. However, the growth of both economies over the next year is anticipated to add up to over 10%.
Since the U.S. has, what some call, a Teflon reputation, it borrows its own currency needed by the rest of the world.
Taking a look at Japan’s situation, its debts are hardly anywhere to be found. 96% of the government bonds in Japan are owned domestically, so their risk is considered minimal. European Union members are heavily dependent on the German economy, with frail credit economies expected to be cut off by the stronger EU members in the rat-race of credit and debt.
Coming back to the United Kingdom, it is a country with its own currency and does not use the Euro in its transactions. The U.K. can borrow without having a foreign exchange risk due to the currency independence; however, its twin deficits of trade and budget are large. This hampers the government from satisfying the investors, both foreign and domestic – who are the major sources needed to repay the debt. The U.K.’s creditworthiness, too, is higher than the criteria required and this is owed to an economic seriousness and political stability within the country.
Inflation’s Role in Reducing Economic Global Debt
Inflation is a good medium to reduce global debt. Rising prices should be welcomed if the people want to refrain from potential tax burden. However, investing in corporate bonds leads to the concern of companies being crowded out by government borrowing. Crowding out refers to the increased interest rates leading to reduced private investment funding. This is not particularly feasible for any economy in the long run. A high crowding-out situation may also lead to reduced overall income in the economy.
Conclusion
Governments worldwide have been rapidly working hard to bring down the global debt burden and ensure that the risk to investors is low. Nevertheless, high government debt has never truly affected investors. The most significant impact anticipated will be on individuals through the medium of increased tax rates. Lastly, soaring global debt in 2021 is an absolute reality which most countries around the world are witnessing, with an aspiration to recover and come out of it as soon as possible.
