- Debt/GDP of China, US, and EU on track to be in upward trajectory for the rest of the decade.
- The US has accumulated the most, while China has the most pronounced upward momentum.
- China can service its debt readily, but slowing growth and aging pose serious fiscal risks.
- Neither revenue nor spending plans in the US get in the way of relentless debt accumulation.
- A period of high inflation, or even financial repression, could be on the cards.
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Commentary: Debt reckoning
There are tremors in the US debt markets, but the fiscal fragility situation is broader. The Global Pandemic of 2020-21 entailed major deficit spending, pushing up public sector debt substantially worldwide, by over 10% of global GDP. Global debt/GDP is slated to reach 95% in 2025, from 84% in 2019.
Among the large economies in the world, debt/GDP is, in most cases, over 75%, well past comfortable territory. High levels of debt issuances cause absorption problems in the financial markets, push up interest rates, and crowd out priority spending, sapping momentum in the private sector. This has been the case in emerging and industrial countries over and over again in economic history.
Baseline projections have debt/GDP of China, US, and EU continue in upward trajectory for the rest of the decade. Among these, the US has accumulated the most, while China has the most pronounced upward momentum. Japan, with its 235% GDP/ratio, is on an entirely different league, but a strong bout of inflation-driven nominal GDP expansion has helped it trajectory to start turning downward. India, aided by strong growth, which has come with a welcome tax buoyancy, is making progress on fiscal consolidation, on track to have its debt/GDP go down through 2030.
China’s debt burden is smaller than that of the US, and the same applies to its cost of debt servicing and associated risks. A large surplus and creditor economy, China saves amply and has no issues finding domestic buyers for its debt. But a slowing economy and the pernicious impact of aging point to a substantial rise in public sector obligations in the coming years.
Then there is the US, which has run an annual fiscal deficit of below 4% of GDP just once in the past decade. Despite Trump administration’s sound and fury with respect to cutting various government programs willy-nilly, through the first five months of the year, federal spending was up 7%yoy, compared to -0.6%yoy at this time last year. Between mounting costs of debt service, defence, and social security, cutting other parts of the government do not amount to meaningful consolidation.
Take, on top of this, the massive tax cuts being legislated at this moment. If passed by the Senate, the “One Big Beautiful” bill is bound to add trillions to US debt and interest costs in the coming years and decades.
General government fiscal deficit of 6-7% of GDP and interest costs of over 4% of GDP for the rest of the decade would put the US economy in a bind and risk financial stability. A period of high inflation, or perhaps even worse, old-school EM-type financial repression to force US institutions to hold more debt and cap interest rates may well be what’s coming.
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