Public debt: When the us sneezes the world catches a cold

According to the IMF’s latest Fiscal Monitor, between 2023 and 2029, many advanced economies are projected to see an increase in their public sector debt to GDP ratio. The US ranks second in terms of increase of the public debt ratio (+ 11.7 percentage points of GDP). Administration and Congress will have no other option than to structurally reduce the budget deficit. However, the challenge will be huge given the unpopularity of tax increases, the difficulty of cutting expenditures and the major headwinds of rising interest charges and, in the medium run, slower GDP growth. Whether the US manages to bring its public finances under control also matters for the rest of the world, given the central role of the US Treasury market and the US dollar in the global financial system. Persistent high budget deficits could exert upward pressure on long-term interest rates in the US and abroad, thereby weighing on growth. It could also cause a depreciation of the dollar.

The IMF’s latest Fiscal Monitor offers sobering reading. Between 2023 and 2029, many advanced economies are projected to see an increase in their public sector debt to GDP ratio (chart 1).

Within the Eurozone, between 2023 and 2029, the largest increase in percentage points (pp) of GDP is expected in Slovakia (14.6 pp), Estonia (11.6 pp), Belgium (11.1 pp) and Finland (10.5 pp). Italy (7.6 pp), Luxembourg (5.6 pp), the Netherlands (5.4 pp) and France (4.5 pp) are also projected to see a significant increase.

Clearly, the economic importance of such a development - including possible concerns about debt sustainability -, depends on the initial debt level. On the other hand, former crisis countries are expected to make huge progress in terms of debt reduction: Greece (-30 pp), Cyprus (-27.4 pp), Portugal (-22.1 pp), Ireland (-11.2 pp). Germany should also see a decline in its debt ratio (-6.6 pp).

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