Reacting to the COVID-19 pandemic and ensuing global mega-recession, advanced nations have opened the fiscal floodgates.
On both sides of the Atlantic, and in the developed parts of Asia, governments are running record peacetime deficits to finance generous employment subsidies, massive loan guarantees and higher spending on healthcare.
Public debt is surging. Major economies will add at least 20 percentage points to their GDP ratios in 2020. Public debt as a percentage of GDP will likely rise to: around 124% of GDP in the US, 102% in the eurozone and to 106% in the UK.
In Japan, which remains in a league of its own when it comes to public borrowing, debt will rise to around 222% of GDP this year.
Should we worry about the extra debt? Not much.
Contrary to the warnings of some commentators during the past decade, which started during the financial crisis when public debt started to surge, financial markets do not seem too panicked by the extra public debt.
Quite the opposite. Despite the sharp rise in public debt, borrowing costs for governments have fallen to near-record lows. No government of a major economy is struggling to finance itself.
The coronavirus recession has merely reinforced four interlinked factors that have caused government borrowing costs in the advanced world to decline over time: 1) a rising glut of global savings seeking a safe haven; 2) declining inflation and inflation expectations; 3) weaker productivity growth in an age of growing economic and political anxiety; and 4) huge central bank balance sheet expansion.
Instead of adding to the risks, the aggressive fiscal action has helped to buffer the huge shock instead.
With help from central banks and their extensive bond purchases and liquidity injections, economic policymakers have prevented the inevitable global COVID-19 recessions from morphing into a financial crisis and depression.
No government of a major economy is struggling to finance itself
There are no hard and fast rules that limit government spending based on some arbitrary ratio of debt or deficit, especially in times of crisis like these.
The usual debt rules that apply to private businesses and individuals do not apply to governments.
Unlike a household or firm, the government is a currency issuer with its own central bank. In principle, it can always meet its debt obligations in its own currency as long as people are willing to accept the pieces of paper with the faces of famous people from history on them that central banks print.
When there are unused resources in the private economy and inflation expectations are well anchored, the government always has the fiscal capacity to spend until full employment is reached or inflation expectations start to rise too much for some other reason.
Learning to live with the virus will involve semi-permanent disruptions to daily life. The risk of a second virus wave looms large. Avoiding this outcome will require a go-slow approach to the easing of lockdowns. This may frustrate the economic recovery, which could be uneven and prone to downside surprises for a while.
In time, once the virus has run its course and economies are recovering nicely, it will be time for governments to think about ways to return public finances to a more sustainable path. But it is still far too soon to think about that.
Providing for people who have fallen on hard times during the downturn while promoting a recovery that returns people to work should remain the immediate and overriding priority of governments in the advanced world.
If that involves persistent high borrowing for the next year until modern medicine wins the fight against COVID-19, then so be it. It is the lesser of two evils.
Kallum Pickering is senior economist at Berenberg Bank
This article was taken from the August/September 2020 issue of The Treasurer magazine.