Why public debt doesn’t matter right now

Countries around the world have conspired to borrow more and more money, as costs mount over dealing with the COVID-19 pandemic.

Public debt is the amount of money that a treasury has borrowed, and still owes, over the years. When people talk about a deficit, they mean the amount the government has over-spent over what the tax has brought in each year.

The U.S. government debt for 2020 alone stood at around $ 27 trillion at the end of the fiscal year, with a budget deficit of $ 3.13 trillion.

The budget deficit was more than triple the shortfall of $ 985 billion last year and more than double the debt observed after the financial crisis in 2009, which stood at $ 1.4 trillion.

Other advanced economies are also struggling with increased borrowing. The UK faces debt of up to 1.87 trillion pounds sterling ($ 2.45 trillion) for the end of fiscal 2020, which could rise for the next fiscal year as coronavirus spending continue to increase.

Most of the U.S. government borrowing went to fund the $ 2.2 trillion CARES Act, which included additional unemployment compensation for workers left unemployed due to the pandemic. It also included incentives for companies to keep their workers.

These numbers may sound scary, but here’s why most economists agree that public debt doesn’t really matter right now.

The International Monetary Fund (IMF) and the World Bank are among two institutions which have recommended that governments borrow to get out of the difficulties caused by the pandemic.

“Only one thing matters: being able to dare.”

Kristalina Georgieva, Director of the IMF

World Bank Chief Economist Carmen Reinhart recently told the Financial Time that a high public borrowing is justified in these circumstances.

“While the disease rages on, what else are you going to do? She told the newspaper. “First you care about waging war, then figure out how to pay for it.”

The IMF has also told countries that have access to financial markets to issue debt and spend regardless of the prospect of austerity later.

IMF Director Kristalina Georgieva said: “Only one thing matters: being able to dare”.

The IMF has so far valued the global increase in spending and tax cuts at $ 11.7 trillion. This represents 12% of global GDP in 2020, a figure that would have been unthinkable ten years ago, when many governments supported austerity as a solution to balance the books, after the financial crisis of 2007-2008.

Some people will ask if the debt can be written off, but there is currently no mechanism in place for this.

When governments borrow money, they borrow it from their citizens and from foreign citizens who have money to lend. These people are mostly wealthy or middle aged with savings and are willing to accept government IOUs, often referred to as bonds.

As long as the cost of servicing this debt remains relatively low, governments will not face major problems as they determine how to repay it, and will be able to roll it over with relatively few problems.

Depending on how governments act in the future, the debt burden is generally reduced as economic growth reduces debt relative to national income, increases additional taxes, and inflation.

In this photo illustration, a close-up of a US $ 1 bill puzzle featuring President George Washington.
Peter Dazeley / Getty Images

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