Global debt soars

Global debt in the first half of 2023 rose by $10 trillion (£8 trillion) to around $307 trillion (£248 trillion), according to the Washington D.C. based bankers' lobby group the Institute of International Finance (IIF), and by $100 trillion (£80 trillion) in the last decade. As a share of gross domestic product (GDP) that debt is now 336%. In other words the world owes more than three times what it is capable of producing.

Interest payments on this huge debt pile are eye-watering but that may not be the worst cost. Debts this high will cut global growth by about 4% this year. Given that economic growth is desperately needed this is nothing short of tragic. The G-24 group of 24 developing nations, which tries to coordinate a group policy on international financial issues, published in 2012 a paper which asserted that the optimum debt-to-GDP ratio for mature economies is 60%; for developing economies it's 40%.

The IIF calculates that more than 80% of the additional debt accumulated in the first half of 2023 was taken on by the mature economies, with the largest increases being in France, Japan, the UK and the US. The rising cost of interest payments is a serious risk to public finances. Interest costs are now rising faster than government revenues. And there is no sign as yet of interest rates being cut - the reverse in fact, as inflation continues to challenge central banks' policy. In the UK annualized core inflation (excluding food and energy) was 6.2% in August, down from 6.9% in July but still shockingly high. The UK is forecast to pay £78 billion ($96 billion) on debt refinancing this year, almost 7% of all spending. The US national debt has now surpassed $33 trillion (£26 trillion). Fiscal discipline - the matching of government spending to what the government gets in revenues - has gone out the window.

Fiscal discipline

Asking for fiscal discipline while conflict in Europe threatens global security is perhaps futile. But even though this is a voice crying in the wilderness, we need to put it on record that the accumulation of new debts cannot go on. In the UK the official inflation figures fail to capture rising costs. The UK military understandably wants more armed drones but the cost of them has gone up by 40% since 2016. Costs of the planned HS2 railway network expansion - part of the UK government's mission to 'level up' the country by distributing opportunities more evenly - have doubled since the 2015 estimate of £56 billion ($69 billion). The international crude oil price is edging back towards $100/barrel as Saudi Arabia and Russia coordinate supply cuts. Inevitably the rising price of crude oil feeds into everything else, stoking inflation.

The only response central banks have to inflation is to raise interest rates, making money more expensive and aiming to curtail demand. Yet the higher interest rates in the US don't seem to be working. The US economy is now 5% bigger than it was in 2019; Americans have continued to spend, propped up by so-called 'excess savings' of more than $2 trillion stimulus money injected into the economy during the Covid-19 pandemic. It's thought that this money may well have all been spent by now, so the economy may start to be hurt soon by the high interest rates. Despite that, interest rates should remain at current levels or even be pushed a bit higher to quash inflation, says the OECD (Organisation for Economic Cooperation and Development).

Sustainable?

The debt has gone way beyond being sustainable, which the International Monetary Fund (IMF) defines as being "if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default". We are approaching a point where some drastic policy is needed to cut the debt. What that policy might be - some kind of debt 'forgiveness' or a concerted mass printing of new money or another extreme - is anyone's guess. The size of the global debt may offer some relief to hard-pressed mortgage holders because it may discourage the US Federal Reserve, the Bank of England, and other leading central banks, from pushing up interest rates further.

Government spending on both sides of the Atlantic is running far ahead of the tax take. The cost of the drive towards net-zero emissions has become an ideological battlefield, with little agreement on the numbers. The consultancy McKinsey has put the cost of getting to net-zero emissions by 2050 will be more than $9 trillion (more than £7 trillion) a year. The aging population will impose heavier welfare, health and pension costs, and will lower the tax take of governments. Migrations of people from countries facing difficulties to better economically-endowed ones will not end. The high debt will slow economic growth; slower economic growth will require more government support for sectors (such as health, in the UK) deemed to be too vital to shrink. If this sounds like a vicious spiral, it probably is; converting it to a virtuous circle will require super-human efforts.