The “unprecedented” fiscal policy response of 11 trillion U.S. dollars worldwide has pushed global public debt to reach a record high, according to the International Monetary Fund (IMF).
“In the face of a sharp decline in global output, a massive fiscal response has been necessary to increase health capacity, replace lost household income and prevent large-scale bankruptcies,” Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, and Gita Gopinath, IMF chief economist, wrote in a blog.
“But the policy response has also contributed to global public debt reaching its highest level in recorded history, at over 100 percent of global GDP (Gross domestic product), in excess of post-World War II peaks,” they noted.
They say the need for more fiscal stimulus is “clear,” as countries gradually reopen, “but this begs the question of how countries can finance it without debt becoming unsustainable.”
Fiscal deficits are expected to be at least five times higher in advanced economies and to more than double in emerging market economies leading to an unprecedented jump in public debt of 26 and 27 percentage of GDP.
Public debt is thought to “stabilize” in 2021 due to low interest rates and a projected strong rebound in economic activity, according to the authors.
“There is a great diversity in debt levels and financing abilities across countries and high uncertainty surrounding the forecasts,” they said. “Borrowing costs can increase rapidly, particularly for emerging economies and frontier markets, as was the case in March.”
The assurance of “a path back to sustainable fiscal balances” for countries would be key in countries that entered this crisis with already elevated debt and low growth.
“Governments will need to pursue a credible medium-term fiscal plan that relies on improving revenue mobilization — including through minimizing tax avoidance, greater tax progressivity in some cases, carbon pricing and higher efficiency in spending,” they argued.
72 countries have so far received IMF emergency assistance, “but far more bilateral and multilateral support will be needed,” they added.