Critical, Global Debt Nearly Reaches 100% of GDP, Highest in 210 Years!

 Global public or government debt will increase to 93% of Gross Domestic Product (GDP) in 2023. This figure is higher than pre-pandemic, even the highest after the Napoleonic Wars around 200 years ago.

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The Covid-19 pandemic in 2020 paralyzed world economic activity. The state then chose to increase debt to finance the budget because revenues from taxes and other sectors fell due to the economic collapse. The pandemic will only subside in 2022 after going through several waves of new variants.

At that time, policies were taken by the government to survive in very tense economic conditions. This was further exacerbated by the Russian-Ukrainian war in early 2022 which had an impact on commodity supply, resulting in inflation soaring sharply and interest rates also creeping up.

The International Monetary Fund (IMF) assesses that the global economic and financial outlook has improved in the last six months. Inflation has fallen, financial conditions have eased, and risks to the economic outlook have balanced.

However, many countries continue to struggle with high public debt and fiscal deficits amid new challenges in the form of high real interest rates and dimming medium-term growth prospects.

For your information, global public debt will soar to 93% of GDP in 2023 and is 9 percentage points above pre-pandemic levels. This increase was led by the two largest economies, the United States (US) and China, whose debt increased by more than 2 and 6 percentage points of GDP, respectively.

Even until 2028, US and Chinese debt is expected to continue to increase, respectively to more than 130% for the US and more than 100% of GDP for China.

Soaring Debt and Dangerous Global Impact

The role of the US and China is very important because it can determine global fiscal developments and prospects. Slowing growth in China could weigh on global growth and trade, creating fiscal challenges for countries with strong trade and investment ties.

High and volatile government bond yields in the US will lead to tighter funding conditions in other countries.

Responding to the less than positive situation, the president of the World Economic Forum (WEF), Borge Brende, gave a clear view of the global economy by saying that the world will face a decade of low growth if appropriate economic measures are not implemented.

Brende warned that global debt ratios were approaching levels not seen since the Napoleonic Wars or the 1810s and there was a risk of "stagflation" in developed countries.

For the record, the Napoleonic Wars (1803-1815) were a series of major conflicts pitting the French Empire and its allies, led by Napoleon I, which rocked the world in the last 214 years or two centuries. This war was the largest before World Wars I and II and battered the world economy.

The IMF projection for global economic growth in 2024 is 3.2%. Brende insists this is not inherently bad but lower than historically. He added that the global growth trend was usually 4% over the previous decades.

With slow economic growth, the increase in debt becomes more worrying.

This amount of debt, which is almost close to 100% of global GDP, is very worrying because this has not been seen since the Napoleonic Wars. Therefore, he suggested addressing the global debt situation by continuing to trade with each other and reducing trade wars between countries.

Furthermore, the government needs to consider how to reduce this debt and take appropriate fiscal steps without getting trapped in a situation that triggers a recession. He also hinted at persistent inflationary pressures and generative artificial intelligence could be an opportunity for developing countries.

Effects of the 2024 Election Globally

By 2024, around 88 countries, or more than half of the world's population, have held or are holding national elections. These 88 countries represent approximately 4.2 billion people and 55% of global GDP.

History shows that governments tend to spend more and tax less during election years. Deficits in election years tend to exceed estimates by 0.4 percentage points of GDP, compared with non-election years. In this great election year, the government must exercise fiscal control to keep public finances healthy.

This condition makes government debt in many countries increasingly mounting.

Countries with the largest debt to GDP ratio in the world (%)

The government must immediately eliminate crisis fiscal policies, including energy subsidies, and carry out reforms to limit spending increases while protecting the most vulnerable groups.

Developed countries with aging populations must rein in spending pressures on health and pensions through entitlement reforms and other measures.

The IMF also recommends that developing countries expand the tax base, improve the design of their tax systems, and strengthen revenue administration.

In its study, the IMF stated that if these steps occurred under ideal circumstances, they would be able to generate an additional 9% of GDP.

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