In recent years, the world has been grappling with an unprecedented global debt crisis, one that has not been eased by the challenges posed by the COVID-19 pandemic. The latest update from the Global Debt Database reveals a concerning trend: while there has been a modest decline in global debt for two consecutive years, it remains significantly higher than the already elevated pre-pandemic levels. At 238 percent of global gross domestic product (GDP), the total debt represents a 9 percent increase from 2019, amounting to a staggering $235 trillion in US dollars. It’s a stark reminder that our policymakers must remain steadfast in their commitment to preserving debt sustainability.
The persistence of high public debt levels is particularly alarming. Even as the global economy has shown signs of recovery since 2020, public debt has refused to budge. Governments worldwide ramped up their spending in response to the pandemic, and fiscal deficits remained high. These deficits were necessary to boost economic growth and respond to surging food and energy prices. However, the consequence has been an increase in public debt by just 8 percentage points of GDP over the last two years, mitigating only half of the pandemic-induced surge.
The story is somewhat different for private debt, including household and non-financial corporate debt, which saw a faster decline of 12 percentage points of GDP. Yet, even this decline falls short of completely erasing the debt accumulated during the pandemic.
Before the pandemic, global debt-to-GDP ratios had been on an upward trajectory for decades. Global public debt tripled since the mid-1970s, reaching 92 percent of GDP by the end of 2022, equivalent to over $91 trillion. Private debt followed a similar trajectory, tripling to 146 percent of GDP, or nearly $144 trillion, between 1960 and 2022.
China has played a pivotal role in driving global debt levels upward. Its debt as a share of GDP now rivals that of the United States, and while its total debt of $47.5 trillion is still below that of the US, it’s essential to note that China’s role in this context is significant. Furthermore, China boasts the largest share of non-financial corporate debt in the world at 28 percent.
Low-income developing countries have also seen substantial increases in debt over the past two decades, though they started from lower initial levels. These countries, despite their relatively low debt levels compared to advanced and emerging economies, face their own set of challenges. The rapid pace of debt accumulation since the global financial crisis has placed more than half of these countries at high risk of debt distress. Additionally, about one-fifth of emerging markets have sovereign bonds trading at distressed levels.
To address these pressing concerns, governments worldwide must take immediate steps to reduce debt vulnerabilities and reverse the troubling long-term debt trends. For private sector debt, this entails diligent monitoring of household and non-financial corporate debt burdens and associated financial stability risks. As for public debt vulnerabilities, it requires establishing a credible fiscal framework to guide the balance between spending needs and debt sustainability.
In the case of low-income developing countries, enhancing their capacity to collect additional tax revenues is imperative. Those with unsustainable debt levels require a comprehensive approach that includes fiscal discipline and debt restructuring under the Group of Twenty Common Framework, a multilateral mechanism for forgiving and restructuring sovereign debt.
Crucially, reducing debt burdens will create fiscal space and encourage new investments, ultimately fostering economic growth in the years ahead. Implementing reforms in labor and product markets at the national level can provide vital support for this goal, as can international cooperation on taxation, including carbon taxation, which could ease the strain on public financing.
The global debt crisis is a challenge that calls for collective action, sound fiscal policies, and a commitment to sustainable economic growth. It is a challenge we cannot afford to ignore, for the well-being of current and future generations depends on our ability to manage and mitigate the risks posed by this mounting debt burden.
Devasya Verma is pursuing his masters in international relations from school of social science, GNDU Amritsar. He has worked with Punjab government in capacity of field researcher on various projects for land acquisition for social purposes.