In 2010, as the global economy began to recover from the financial crisis that had occurred only two years earlier, the UK was at the forefront of a shift towards austerity. The decade of weak growth and political instability that followed means few are interested in repeating the exercise after the coronavirus pandemic. Chancellor Rishi Sunak, who presented the government’s latest spending review on Wednesday, said over the weekend that he would agree with Prime Minister Boris Johnson that there should be no return to the era of spending cuts.
Britain is not alone in this dilemma. To survive the coronavirus pandemic that closed large parts of society and changed the parts that were still open, the world took on more debt than ever before. The Institute of International Finance, a trading group for the financial industry, estimates the world increased borrowing from 320 percent of global income to 365 percent in the first nine months of 2020, a new record.
There is no need for governments in rich countries to rush to cut public finances. The sustainability of public debt does not depend on its amount, but on its cost. With long-term interest rates at record lows in developed countries, governments can borrow cheaply for decades. The 30-year UK bonds offer a yield of just 0.9 percent, making the one-time cost of the pandemic easy to handle for decades to come. There was hardly a better time to tackle such large deficits.
This loan made sense; Debt is a tool for dealing with such situations accurately. The ability to remit and delay payments until the world economy is in better shape will make the pandemic more manageable and the economic scars less pervasive. Failure to take on more debt means mass bankruptcies and unemployment. Without effective support, workers would be less able to heed news to “stay home” spread the virus and cause more economic damage.
However, not everyone has the same luxury as advanced economies of taking out and paying back loans cheaply over decades. Many poorer countries have relied on debt with a much higher cost and shorter maturity. The dangers are clear: so far Argentina, Belize, Lebanon, Ecuador, Suriname and Zambia have failed to repay their debts or have had to restructure them during the pandemic.
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Much of the debt that poorer countries have used to tackle the coronavirus will end up on the balance sheets of rich countries’ governments. The G20 group, which met over the weekend, did not agree to a new common framework for debt relief for poor countries, but continued to offer measures to delay planned repayments. Ultimately – perhaps after the inauguration of US President-elect Joe Biden – relief efforts need to move beyond immediate cash flow problems and address long-term debt sustainability.
Once the pandemic is finally under control, governments of advanced economies will need to cut their own deficits to more sustainable levels – at least in part because aging societies will increase the cost of pensions and health care. The discovery of seemingly viable vaccines means they can count on them to be generous now – the pandemic will come to an end and it is not a perpetual commitment. It makes sense for governments to plan now how to reduce deficits in the future. However, implementing these plans too quickly would jeopardize global recovery – and could exacerbate long-term economic damage.