Governments will face growing debt in the next decade, according to Tharman Shanmugaratnam, Singapore’s senior minister.
He added that growing debt will be one of the biggest challenges of most nations.
Worldwide, governments have boosted spending to aid their economies that were badly affected by the coronavirus pandemic. Some countries have to borrow more to do make it happen — which Tharman considers as a “sensible economic strategy” when dealing with the crisis and uncertainties.
However, “the big issue in the next decade is how to ensure that debts are sustainable,” said Tharman, an economic and finance analyst, at the opening day of the virtual Singapore Summit.
He explained that the new high levels of debt that countries are facing would not continue without hampering growth. Tharman said that this is because economies can no longer depend on quick economic growth and inflation to reduce debt.
“Rapid growth is no longer possible, these are now aging societies, productivity growth is much lower than before,” said Tharman, who headed the International Monetary and Financial Committee from 2011 to 2015. The IMFC is the International Monetary Fund’s policy steering body.
“And inflation is not going to be tolerated by older societies. They may be tolerated when societies are young and everyone’s incomes are going up, it’s not going to be tolerated now,” he noted. Moreover, current ultra-low interest rates will at some point reach more normal levels — which will increase the cost of debt financing, Tharman said. Because of this, governments must strategize on how to balance their budgets with boosting their economies without expanding the deficit.
However, Tharman pointed out that very few advanced countries are addressing the issue. He mentioned Germany and Italy as among the countries with a primary budget surplus.
“It’s a very serious issue. You’re going to need fiscal reforms, not simply cutting down on spending but quality spending and ways of raising revenue that don’t dent growth,” he said. He also believes that governments must incentivize private investments to have a positive impact on productivity growth and dodge secular stagnation.
Global aid
The International Monetary Fund (IMF) previously said that the global economy may not recover from the coronavirus outbreak next year.
It is highly unlikely that the global economic activity, which has been slowed down by the coronavirus pandemic, would fully recover even by the end of 2021, said Gita Gopinath, chief economist at the IMF.
IMF downgraded its economic predictions this week. The fund suggests that the global economy will plunge by 3% this year before recuperating by 5.8% next year. Gopinath describes this rebound as a “partial recovery.”
“We have a recovery projected for 2021 of 5.8% growth, but that is a partial recovery,” Gopinath told CNBC’s “Squawk Box Asia."
“So even by the end of 2021, we’re expecting level of economic activity to be below what we had projected before the virus,” she noted.
The economic damages brought by the coronavirus pandemic can push half a billion people into poverty, according to the new report released by Oxfam.
“I think if you compare that to the global financial crisis … the response has been just that much speedier and the scale of it has been that much bigger,” she said, noting that economies around the world have announced about $8 trillion worth of fiscal stimulus.
“The concern we have is more about developing and emerging economies that have less of fiscal space, have to deal with external account problems, and I think they’re in a tougher spot,” she said.
