Editor’s Note: In this article, Eswar Prasad and Mengjie Ding discuss their in-depth analysis of global public debt levels. 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.
The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23 trillion in 2007 to an expected $34 trillion in 2010. IMF forecasts indicate the level will reach $48 trillion in 2015. The ratio of world debt to world GDP rose from 44 percent in 2007 to 59 percent in 2010, and is expected to climb to 65 percent in 2015.
Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy.
To guide the debate on these issues, we analyze trends in the composition of world public debt and also calculate the burden of this debt—which we define as the ratio of debt to total and working-age populations. Our analysis is based on data from the IMF’s Fiscal Monitor (May 2010), the World Economic Outlook database (April 2010) and updated information from national sources.
AEs account for the bulk of the increase in global public debt since the start of the crisis. Relative to the size of their economies, debt levels in AEs are expected to continue rising in the next few years. By contrast, debt ratios will shrink for emerging markets (EMs).
- Aggregate debt of AEs will increase from $19 trillion in 2007 to $29 trillion in 2010, and is expected to rise to $42 trillion in 2015. The corresponding numbers for EMs are $4 trillion, $5 trillion and $7 trillion, respectively. (See Figure 1 – pdf)
- The ratio of aggregate debt to aggregate GDP for AEs will rise from 48 percent in 2007 to 71 percent in 2010 and further to 85 percent in 2015. The corresponding ratios for EMs are 30 percent, 30 percent and 26 percent, respectively. (See Figure 1 – pdf)
There is a stark contrast between AEs and EMs in their relative contributions to growth in world debt versus the growth in nominal world GDP (measured in U.S. dollars at market exchange rates). EMs contribute far more to growth in global GDP than to the growth in global public debt, reflecting an improvement in their fiscal positions while AEs experience a fiscal deterioration in both absolute and relative terms.
- In 2007, EMs accounted for 24 percent of world GDP and 17 percent of world debt. By 2015, EMs are expected to produce 35 percent of world output and account for just 14 percent of world debt. (See Figures 2-3 – pdf)
- EMs accounted for 10 percent of the increase in global debt levels from 2007 to 2010 and are expected to account for 13 percent of the increase from 2010 to 2015. By contrast, their contributions to global GDP over these two periods are 70 percent and 54 percent, respectively. (See Figures 4-5 – pdf)
- The two biggest AEs are making a far greater contribution to the rise in global debt than to the rise in global GDP. The U.S. contributes 35 percent of the increase in global debt from 2007 to 2010 and 39 percent from 2010 to 2015. Its contributions to global GDP over those two periods are 13 percent and 19 percent, respectively. Japan accounts for 26 percent of the increase in debt from 2007 to 2010 and 22 percent from 2010 to 2015 while its contributions to global GDP increases are 17 percent and 5 percent, respectively. (See Figures 4-5 – pdf)
The traditional approach to evaluate debt levels is to examine the ratio of debt to GDP. (See Figure 6 – pdf) There is a widening gap between AEs and EMs in their debt to GDP ratios.
A different approach that gets at 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 AEs and EMs. (See Figure 7 and Table – pdfs)
- The average per capita debt in AEs was $19,400 in 2007, rises to $29,100 in 2010 and will go up to $41,000 in 2015. The burden of debt for U.S. citizens will rise from $19,700 in 2007 to $31,600 in 2010 and then to $48,000 by 2015. The debt burden for Japanese citizens will hit $75,900 in 2015, the highest level in the world.
- Average per capita debt for EMs is also rising and will go up to $1,500 in 2015, far lower than AE levels. China’s debt burden will be $1,200 in 2015. China could in principle pay off its entire public debt by selling its stash of U.S. government bonds.
The burden of the public debt may ultimately fall on the working-age population rather than the entire population, though inflation that erodes the real value of debt would of course hurt everyone. There is an even sharper contrast between AEs and EMs when we calculate the debt burden of the working-age population (ages 20-64). (See Figure 8 and Table – pdfs)
- Among AEs, average debt per working-age person will more than double from $31,700 in 2007 to $68,500 in 2015. Japan is tops among all countries by this measure and the U.S. moves into second position by 2015. U.S. debt per working-age person goes from $32,300 in 2007 to $79,200 in 2015. For Japan, it nearly triples from $46,200 in 2007 to $134,500 in 2015.
- For EMs, average debt-per working-age person rises to $2,600 in 2015, a level far lower than that of the AEs. In the case of China, this measure of the debt burden will be $1,800 in 2015.
Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in AEs. But perhaps the worst is yet to come. First, AEs as a group are experiencing little population growth. Second, they are facing rapidly aging populations. Third, their economies are likely to register slow growth, especially relative to the EMs. Fourth, entitlement spending on health care and pensions is likely to explode due to unfavorable demographics.
AEs had better get their fiscal act together once the recovery is better entrenched. It will take strong political will to tackle near-term deficits and then to control the growth in entitlement spending. In the absence of decisive action, ballooning public debt in the AEs could become a major threat to domestic and global financial stability.
List of Figures and Technical Notes (pdf files)
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, 2010 and 2015
This figure shows the contributions to changes in aggregate sovereign debt and GDP among major countries and country groups from 2007 to 2010 and from 2010 to 2015
This figure shows country-specific data on net debt to GDP ratios for major economies in 2007, 2010 and 2015
This figure shows country-specific data on ratios of net debt to working-age population in the 20-64 age range for major economies in 2007, 2010 and 2015
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.