We are sitting on a mountain of debt. The global debt race has reached an all-time high: 313 trillion dollars. The data from the Institute of International Finance (IIF) speak clearly: governments, families, businesses and banks have started to get into debt again, indeed there was an acceleration in 2023 with 15 trillion more than at the end of 2022. The world is always more indebted. Why does the race speed up? And who will pay in the end?
“It's very easy to increase spending, but very difficult to cut it or raise taxes. There is a characteristic of the dynamics of public spending: if it grows, that increase remains, it is difficult to go back. We are passing on the expenses we enjoy to our children and grandchildren”, explains Paolo Manasse, professor of Macroeconomics at the University of Bologna
It was 2021 when global debt exceeded 300 trillion dollars. And to explain the figure there were the expenses incurred by all countries to deal with the pandemic. Today we have returned to those records, or rather surpassed them: 313 trillion dollars. What happened? There are aspects common to all geographical areas. “The first reason is the sequence of negative shocks of a recessive nature: the 2008 crisis, the debt crisis in Europe, Covid, the recession following the increases in raw materials and now the wars. On the one hand, this has pushed governments to increase spending (to deal with social needs such as unemployment) and on the other it has led to a reduction in GDP (revenue), creating imbalances between expenditure and revenue which must be financed in debt. The second reason is the very strong increase in interest rates in recent years, after a decade of negative or zero rates. Governments thus found themselves managing a much more expensive burden of public debt, which created more debt, in a vicious circle,” explains Manasseh. Then there are factors specific to certain areas of the world. For example, Asian countries, except Japan, have lower debts than Europe and the United States because they do not have the same problems related to the age of the population. In aging continents, public spending on pensions and healthcare increases. Another example: countries rich in raw materials have accumulated less debt in recent years than those that have had to import raw materials with increased prices.
In 2023 compared to 2022, government debts went from 83,600 billion to 89,900 billion, those of families from 57,000 billion to 59,300 billion, those of businesses from 90,000 billion to 94,400 billion and those of financial companies from 67,100 billion to 69,400 billion. Adding up: 15,300 billion more in a year. It is worrying when the use of debt is not followed, as happens today, by an equal increase in household savings. There are two worrying aspects of this very rapid increase in debt: the prospect of international economic growth and the risk of chain effects if doubts and risks of default of large countries are raised”, warns Manasse. And debt has increased particularly in countries such as the United States, France and Germany. In general, its relationship with GDP has decreased, given the slowdown in economic growth.
But in the end who will pay this mountain of debt?
“In the ideal world, if the revenues from debt injections were invested in projects (infrastructure, education, public investments) that increase the GDP of future generations, the debt would repay itself. But is not so. Only a tiny fraction of these expenses go towards creating growth. It is used for current expenses (pensions, subsidies…), to plug leaks without generating an economic return that can be repaid. Then the debt will be discharged and repaid by future generations, who will have access to fewer services or will have to pay more taxes. We are passing on the expenses we enjoy today to the future of our children and grandchildren”, concludes Manasseh.
