The World’s Most Indebted Governments 2020

Governments spend money on health care, education, infrastructure, defense activities and a plethora of other services and goods. But why do governments have to borrow money, especially those of the richest nations? For the simple reason that things do not always go as planned. 

Sometimes tax revenues are less than predicted and by borrowing a government can cover the temporary shortfall without cutting back on spending. Sometimes the shortfall is not temporary and the government is running a structural deficit. Sometimes a pandemic on a scale not seen in over 100 years threatens the lives and livelihoods of millions across all regions. To sustain the economy amid lockdowns and other disease-fighting measures, governments had to borrow and borrow big. The IMF said in its September 11 Fiscal Monitor report that fiscal expenditures prompted by the pandemic amounted globally to $11.7 trillion. This figure—along with all the supplemental economic stimulus measures that are already in the pipeline—is forecast to push the total public worldwide debt to a record level of about 100% of the GDP, up from about 83.0% in 2019. This ratio, the IMF added, will stay with us until at least 2025.

The only way to dig the world out of debt now appears to be: more debt. “High public debt levels are not the most immediate risk,” said the director of Fiscal Affairs Department at the IMF, Vitor Gaspar, during a recent press briefing: “The near‑term priority is to avoid premature withdrawal of fiscal support. Support should persist at least into 2021 to sustain the recovery and to limit long‑term scarring.” Emergency countermeasures—he said—must continue to be deployed to restore orderly financial market conditions and consumer spending, support health and education, provide a lifeline to millions of vulnerable individuals and prevent them from falling into poverty. The implication is that since raising taxes on more affluent individuals and corporations and finding new revenue in the middle of the crisis is close to impossible, it can—and must—be done at a later time to pay down the debt incurred in the meantime.

How well policymakers manage the pandemic-driven global depression also explains the skepticism of many economists when it comes to establishing a fixed debt-to-GDP ratio—often simply referred to as the “tipping point”—after which productivity rates decline or the risk of default increases substantially. Certain empirical evidence substantiates this agnostic position. A country like Japan has been able to sustain debt above 200% of GDP for more than a decade. While such a level of debt is certainly not healthy, just this year, Argentina and Ecuador—with debt ratios that are roughly half and a third of that—defaulted on their obligations. While the size of the debt matters, the ability to make the payments is even more important. Who is owed money is also crucial. Most of Japan’s debt is internal—meaning that the country’s debt is held by its own citizens—diminishing greatly the risk of defaulting. Many other countries owe mostly to foreign creditors and these foreign creditors can be either trusted allies or rivals using loans as leverage to extend their strategic or military reach, a situation aptly called “debt trap.”

So how much debt is too much debt? There is no consensus among economists: some—while agreeing that national accounts must be kept in check—reject the idea that there is an optimal “one size fits all” debt-to-GDP ratio. Other economists economists argue that negative effects on economic growth begin as soon as the national debt reaches about 60% of the GDP in developing and emerging economies and about 80% in developed nations while others say 40% and 60%, respectively, are prudential thresholds to be wary of. When interest rates are low and a country is going through an economic slowdown, borrowing money may be a more attractive option politically and economically than raising taxes which can dent growth. However, the key to government is that a government must be able to run a primary surplus (the excess of tax revenues over program spending) sufficient to pay back what was borrowed by a set deadline. Public debt, also called “government debt” or “national debt,” includes money owed by the government to creditors within the country (domestic, or internal debt) as well as to international creditors (foreign, or external debt).

Debt is a double-edged sword. It is often used to generate future growth, but fiscal discipline is crucial: persistently running deficits means sooner or later the default point will be reached—not considering that even when default is avoided, the snowballing cost of financing debt becomes an unaffordable burden over the shoulders of future generations. 

Borrowing to finance public spending requires a careful balancing act. Doing so can either promote growth or lead to fiscal imbalances that stifle it. The IMF estimates that an increase of just 1% of GDP in high-quality public investment in both advanced economies and emerging markets could raise productivity by 2.7%, private investment by 10%, and create between 20 million and 33 million jobs. To use the words of Vitor Gaspar, fiscal policy can be a bridge out of this crisis to “smart, resilient, sustainable, and inclusive growth.”

Percentage of Public Debt to GDP

Source: International Monetary Fund, World Economic Outlook Database, October 2020.