- BBC World News
Countries around the world have applied different strategies to combat the coronavirus pandemic, but almost all have done something in common: increase their public spending to face the health crisis.
In addition to health expenditures, most governments have offered financial assistance to people and businesses economically affected by the paralysis brought on by the pandemic.
In a report on the fiscal situation of the world economy published last October, the International Monetary Fund (IMF) estimated that around the world they have spent about US $ 12 billion in “cushioning the blow” of covid-19.
These fiscal measures “have saved lives and livelihoods,” the agency stressed.
However, such an increase in international public spending, added to the sharp drop in tax revenues as a consequence of the paralysis of activity, has also generated something unprecedented.
It has led to global public debt reaching its all-time high and for the first time it is close to 100% of the international Gross Domestic Product (GDP).
In other words, it has caused that for the first time in history global public debt equals the size of the world economy.
However, far from what one might think, the IMF does not advise cut spending.
Conversely. The agency’s director, Kristalina Georgieva, has repeatedly emphasized the risks of a premature reduction of the stimulus.
“Where the pandemic persists, it is critical to maintain lifelines throughout the economy, for businesses and workers, such as tax deferrals, credit guarantees, cash transfers and wage subsidies,” Georgieva noted.
“Continued monetary accommodation and liquidity measures are equally important to ensure the flow of credit, especially to small and medium-sized companies, thus supporting employment and financial stability,” he said in a speech in early October.
“Cut the lifelines too soon and the long ascent (of recovery) becomes a precipitous fall“, he warned.
Although the IMF estimates that government budget deficits will increase from 3.9% of GDP to 12.7% in 2020, considers it something transitory.
“What we see is a one-time increase in debt in 2020, then a stabilization after 2021, and even a slight downward trend in 2025“IMF Fiscal Affairs Director Vitor Gaspar told Reuters.
The agency is even encouraging some countries, reluctant to increase spending, to take advantage of low interest rates to invest in infrastructure.
Their estimates suggest that an investment in public infrastructure of 1% of GDP could boost production by 2.7%, creating between 20 and 33 million jobs.
According to Gaspar, the resumption of economic growth and extremely low interest rates will help alleviate primary budget deficits.
“The difference between interest rates and growth is not only negative, but more negative, in our projections, than it was before covid-19. Therefore, low interest rates play an important role in the dynamics of the debt, “he assured.
The IMF is not alone in saying that the unprecedented level of public debt is not necessarily a bad thing.
There are several economic actors who agree that, far from generating panic, this record spending is exactly what is needed to revive the global economy.
“The pandemic appears to be changing what many think about considerable public debt,” observes John Letzing, digital editor of Strategic Intelligence at the World Economic Forum.
“Those who may have ever been scared by the concept now seem to agree with himl, if the money is used well and the interest owed remains relatively low. “
According to Letzing, not so long ago there was a general consensus that the burden of a country’s public debt should be kept well below the size of its economy.
“In the United States, public debt amounted to approximately 60% of GDP on the eve of the global financial crisis just over a decade ago,” he details.
“And the founding treaty of the European Union (EU) actually set a public debt limit of 60% of GDP.”
“But like other things that were once taken for granted, the pandemic has removed, at least temporarily, that EU guideline, as policy makers rush to shore up economies,” he says.
The biggest debts
According to IMF calculations, 30 countries will exceed 100% debt relative to their GDP in 2020, due to their response to the pandemic.
At the top of the list is Japan, which was already the most indebted country, with a public debt of 238% of GDP. This year, the figure would rise almost 30 points more, to 266%, according to that organization.
Sudan and Greece will also have debts above 200% of their GDP, according to estimates. The African country would go from 202% to 259% and the European from 181% to 205%.
Eritrea, Lebanon, Italy, Portugal, Cape Verde, Belize, Barbados, USA, Singapore, Bahrain, Spain, Mozambique, Bhutan, Angola, France, Cyprus and Belgium complete the ranking of the 20 most indebted countries.
These perspectives have led some legislators in these countries to demand that governments that they start to cut spending related to covid, before growing debt creates a problem.
Many of these politicians propose that the quarantines and restrictions be lifted instead and economies are reopened.
But nevertheless, think tanks as the US Center on Budget and Policy Priorities warn that this would be a mistake.
“Contrary to some previous theories, there is no evidence that a certain ratio of debt to GDP precipitates a debt crisis“the institute noted in a report.
“Reopening the economy has failed as a strategy to strengthen family and state finances, and this strategy cannot justify the withdrawal at the federal level of strong fiscal aid for families and states,” he added.
The research center also warned that “a wrong and premature turn toward fiscal austerity prevented recovery after the Great Depression, and lawmakers should avoid making the same mistake now. “
Risk for the poorest
However, the same actors who believe that the historic global public debt should not cause alarm or lead governments to reduce their spending during the pandemic, also warn that the situation it won’t be the same for everyone.
Letzing, of the World Economic Forum, acknowledges that “record levels of public debt will create financial challenges in many parts of the world.”
“Developing countries, for example, may be unable to tap into the same resources as their wealthier peers, and it is likely that they will soon be forced to pay billions of dollars in debt payments,” he warns.
Georgieva, the director of the IMF, has also warned that “many countries have become more vulnerable“due to its debt levels.
The economist maintains that coordinated action must be taken to help these countries “deal with their debt.”
“They entered this crisis with already high debt levels and this burden has only grown heavier. If they want to fight the crisis and maintain vital political support; if they want to avoid reversing the development gains made over decades, they will need more help and fast“, he pointed.
“This means access to more subsidies, concessional credit and debt relief, combined with better debt management and transparency,” he detailed.
Georgieva said that “in some cases, global coordination will be necessary to restructure sovereign debt, with the full participation of public and private creditors.”
“The long climb”
According to the head of the IMF, the world is currently going through a “long ascent” to get out of the crisis that the coronavirus brought.
This difficult climb will be “uneven, uncertain, and prone to setbacks,” he warned.
“As we embark on this ‘climb’, we are all united by a single rope, and we are only as strong as the weakest climbers. They will need help to go up, “he concluded.
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