A looming storm cloud hangs over the world's wealthiest nations: a tidal wave of government debt. The Organization for Economic Cooperation and Development (OECD) paints a stark picture in its latest report, predicting record borrowing by developed countries this year. This surge in national debt threatens to strangle economic growth and burden future generations.
Total borrowing by governments in rich countries is projected to hit a staggering $15.8 trillion in 2024. This surpasses the previous peak set in 2020, when governments scrambled to support economies ravaged by the COVID-19 pandemic. The report reveals a concerning trend - borrowing continues to climb even as pandemic relief programs wind down.
This year also marks a record for refinancing maturing bonds, with a staggering $12.6 trillion coming due. While these bonds were issued at historically low interest rates, the current inflationary climate paints a different picture. Governments now face the prospect of issuing new debt at significantly higher rates, pushing the average cost of borrowing to a worrying 4% in 2023, compared to a mere 1% just two years ago.
The consequence? A significant rise in the cost of servicing this debt mountain. Interest payments are expected to consume a larger chunk of annual economic output, jumping from 2.9% in 2023 to a projected 3.4% by 2026. This translates to less government spending on vital public services like healthcare and education.
Adding fuel to the fire, a crucial source of demand for government debt is drying up. Central banks, who aggressively bought government bonds after the 2008 financial crisis, are now reversing course by selling off their holdings in a process called quantitative tightening. This shrinks the pool of potential buyers and could push interest rates even higher.
The report also highlights a concerning trend - the U.S. share of total debt has ballooned in recent years. By 2023, the US accounted for nearly half of the total debt stock among OECD nations, a significant doubling from its pre-crisis levels. This dependence on borrowing raises concerns about the long-term sustainability of the American economy.
The OECD report serves as a stark warning to governments around the world. Without decisive action to rein in spending and explore alternative revenue streams, the rising tide of debt could cripple economic growth and burden future generations. Striking a balance between fiscal responsibility and supporting economic activity will be a delicate dance for policy makers in the years to come.
