Editor’s Note: In this article, Eswar Prasad and Mengjie Ding discuss their in-depth analysis of the global debt burden. The Financial Times has produced an interactive online feature (free registration required) that shows the burden of public debt in countries around the world based on their research.
Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.
Recent events in Greece, Ireland, Portugal and other economies on the periphery of the eurozone show the risks of debt buildups that are not tackled. Bond investors can quickly turn against a vulnerable country with high debt levels, leaving the country little breathing room to balance its fiscal books and precipitating a crisis.
Overall, IMF’s latest Fiscal Monitor (FM, April 2011 and June 2011 Update) and World Economic Outlook (WEO, April 2011 and June 2011 Update) show that the level of aggregate net government debt in the world rose from $21,900bn in 2007 to an expected $34,400bn in 2011. IMF forecasts indicate the level will reach $48,100bn in 2016. The ratio of world net debt to world GDP rose from 42 percent in 2007 to 57 percent in 2011, and is expected to hit 58 percent in 2016.
Over the past year, there has been a modest improvement in the forecasts for U.S. debt levels relative to earlier forecasts thanks to stronger revenues and lower spending levels than expected. If the U.S. recovery remains weak and employment growth stalls, some of this apparent improvement may be reversed. Japan’s debt ratio is expected to worsen as a result of tepid output growth and the reconstruction costs following the earthquake and tsunami. Lack of growth has also worsened the debt positions of peripheral European economies.
- Aggregate debt of advanced economies will increase from $18,100bn in 2007 to $29,500bn in 2011, and is expected to rise to $41,300bn in 2016. The corresponding numbers for emerging market economies are $3,800bn, $4,900bn and $6,700bn, respectively.
- The ratio of aggregate debt to aggregate GDP for advanced economies will rise from 46 percent in 2007 to 70 percent in 2011 and further to 80 percent in 2016. The corresponding ratios for emerging market economies are 28 percent, 26 percent and 21 percent, respectively.*
There is also a stark contrast between advanced economies and emerging market economies in their relative contributions to growth in world debt versus growth in world GDP. Emerging market economies contribute far more to growth in global GDP than to the growth in global public debt.
- In 2007, emerging market economies accounted for 25 percent of world GDP and 17 percent of world debt. By 2016, they are expected to produce 38 percent of world output and account for just 14 percent of world debt. (See Figure 2-3 – pdf)
- Emerging market economies account for 9 percent of the increase in global debt levels from 2007 to 2011 and are expected to account for 13 percent of the increase from 2011 to 2016. By contrast, their contributions to increases in global GDP over these two periods are 66 percent and 56 percent, respectively. (See Figure 4-5 – pdf)
- The United States contributes 37 percent of the increase in global debt from 2007 to 2011 and 40 percent from 2011 to 2016. Its contributions to global GDP over those two periods are 8 percent and 18 percent, respectively. (See Figure 6 – pdf)
Another way to understand the burden of public debt is to examine the level of debt per capita. Richer economies can of course afford more debt but this is still an instructive calculation as it highlights the growing gulf between advanced economies and emerging markets. (See Figure 7 and Summary Table – pdf)
- The average per capita debt in advanced economies is $29,600 in 2011 and is expected to be $40,400 in 2016. The burden of debt for U.S. citizens is $34,200 in 2011 and will rise to $49,100 by 2016. The debt burden for Japanese citizens will hit $85,000 in 2016, the highest level in the world.
- Average per capita debt for emerging markets is predicted to rise gradually to $1,500 in 2016, far lower than advanced economy levels. In 2016, the debt burden will be $800 for China and $1,300 for India.
- Among advanced economies, the average debt per working-age person will more than double from $27,600 in 2007 to $62,000 in 2016. Japan tops all countries and the United States will move into the third spot by 2016. U.S. debt per working-age person goes from $29,000 in 2007 to $73,300 in 2016. For Japan, it more than triples from $42,700 in 2007 to $140,300 in 2016.
- For emerging markets, average debt-per working-age person rises to $2,200 in 2016, a level far lower than that of the advanced economies. For China, this measure of the debt burden will be $1,100 in 2016.
The path to reducing vulnerable debt levels is not an easy one. Advanced economy governments need to strike a delicate balance between supporting weak recoveries while laying out a clear strategy for bringing down their deficit and debt levels once growth picks up.
In the United States, this balancing act is complicated by the debt ceiling negotiations. U.S. politicians are playing with fire if they feel that their brinksmanship will have no major repercussions. The U.S. is large, special and central to global finance but the tolerance of bond investors surely has its limits. The debt ceiling negotiations are an opportunity for fundamental fiscal reforms rather than tinkering at the margin. If the government doesn’t rise to the challenge, the consequences could be dire—financial turmoil, a more sluggish recovery, and weaker long-term growth prospects.
Advanced economies need to learn the lessons of fiscal discipline that for so long they preached to the emerging markets.
List of Figures and Technical Notes (pdf)
Figure 1. World Government Debt
This figure shows the level of aggregate debt and aggregate debt-to-GDP ratios from 2006 to 2016
Figures 2-3. Global Distribution of Debt and GDP
This figure shows the global distribution of sovereign debt and GDP among major countries and country groups for 2007, 2011 and 2016
Figures 4-5. Contributions to Changes in World Debt and GDP
This figure shows the contributions to changes in aggregate sovereign debt and GDP among major countries and country groups from 2007 to 2011 and from 2011 to 2016
Figure 6. Cross-Country Comparison of Net Debt to GDP ratios
This figure shows country-specific data on net debt to GDP ratios for major economies in 2007, 2011 and 2016
Figure 7. Cross-Country Comparisons of Net Debt Per Capita
This figure shows country-specific data on ratios of net debt to population for major economies in 2007, 2011 and 2016
Figure 8. Cross-Country Comparisons of Net Debt Per Working-Age Person
This figure shows country-specific data on ratios of net debt to working-age population in the 15-64 age range for major economies in 2007, 2011 and 2016
* A note of caution on reported debt levels of emerging markets: in China, for instance, financial liabilities of provincial governments and contingent liabilities such as nonperforming assets held by the state-owned banking system imply a higher value of government debt obligations than suggested by official statistics. Of course, as the recent crisis has shown, advanced economy governments have similar implicit contingent liabilities if their big banks were to run aground or their public pension systems were to run out of money.
There's a far greater concentration of wealth than there is a concentration of income. And that actually has quite a separate effect and impact on the economy.