Global public debt is set to rise “modestly” in 2021 after some US$14 trillion was spent last year to tackle economic damage from the coronavirus pandemic, according to the International Monetary Fund (IMF).
The IMF estimated in its “Fiscal Monitor Update” published on Thursday that global public debt is set to reach 99.5 per cent of gross domestic product (GDP) in 2021, up slightly from 97.6 per cent at the end of 2020.
Governments around the world used the money to support their virus-hit economies, but because of declining revenue from economic contraction, these measures have also led to a rise in public debt and deficits, which are more pronounced in advanced economies.
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The IMF said in the report that advanced economies recorded the largest increases in fiscal deficits and debt, reflecting both higher spending and declines in revenue, while in emerging markets, the rise in deficits stemmed largely from depressed tax receipts due to the economic recession.
The IMF estimates that gross government debt-to-GDP ratio soared to 122.7 per cent in 2020 for advanced economies on average from 104.8 per cent in 2019.
The total gross-debt-to-GDP ratio for the United States is projected to be 132.5 per cent in 2021, slightly up from 128.7 per cent in 2020, according to the IMF.
In March and April last year, the US government agreed to spend funds equal to 14.8 per cent of its national GDP on households, firms as well as state and local governments, before the US Congress passed an additional federal fiscal stimulus package equivalent to 4.3 per cent of GDP in December.
China, the world’s second largest economy, is the main driver of overall debt in the emerging markets category after Beijing unleashed a flurry of stimulus measures last year to revive its coronavirus-hit economy.
These measures included increasing the issuance of local government special purpose bonds to fund infrastructure projects, lowering lending rates, cutting taxes and lifting the budget deficit ratio to 3.6 per cent of GDP to allow for more government spending.
The IMF expects the average government debt for emerging markets, including China, will continue to rise in 2021.
General government debt in China is expected to reach 69.4 per cent of GDP in 2021, higher than the emerging market average of 66.6 per cent, according to IMF’s estimates.
China recorded a GDP growth rate of 2.3 per cent last year after its economy contracted by 6.8 per cent in the first quarter of 2020 when it was hit by the coronavirus outbreak, and China is expected to be the only major economy in the world to record a positive growth rate for last year.
Fiscal policy is already pivoting towards rebalancing the growth model of China. From that viewpoint, it’s important that the fiscal support be such as to strengthen the dynamics of consumption pivoting away from exports and investment
“It’s important to recognise that part of this achievement was possible because of fiscal policy support,” said Vitor Gaspar, director of IMF’s fiscal affairs department.
“Fiscal policy is already pivoting towards rebalancing the growth model of China. From that viewpoint, it’s important that the fiscal support be such as to strengthen the dynamics of consumption pivoting away from exports and investment.”
The Chinese government has become increasingly concerned with the side effects of its stimulus measures, such as rapid credit expansion, a growing amount of bad loans and ballooning local government debt.
People’s Bank of China governor Yi Gang told the World Economic Forum on Wednesday that China’s monetary policy will continue to support economic growth and that the central bank will watch debt and non-performing loan risks.
“We will ensure our policies are consistent and stable, and we will not exit from supporting policies prematurely,” Yi said.
The US, on the other hand, has plans to boost its stimulus package, with President Joe Biden already outlining a new US$1.9 trillion proposal – dubbed the “American Rescue Plan” – that includes US$415 billion to bolster America’s response to the coronavirus outbreak and to fund the roll-out of vaccines.
It also includes US$1 trillion in direct relief to households and roughly US$440 billion for small businesses and communities that have been hit particularly hard by the pandemic.
The US government will issue additional payments to middle-class households of US$1,400 – topping up the US$600 payments delivered by the last congressional stimulus legislation passed in December. Supplemental unemployment insurance will also rise to US$400 a week from US$300 a week, and will be extended until September.
The US has ample fiscal space and “very large capacity to act”, IMF’s Gaspar said, adding that Biden’s proposed stimulus plan, if approved by the US Congress, could have “considerable impact” on growth of the world’s largest economy over the next two years.
“That would contribute to nominal GDP growth and to the objective of the Federal Reserve system to increase inflation temporarily above the two per cent target,” Gaspar added.
For three quarters of advanced economies, the fiscal deficit in 2021 is expected to shrink, as pandemic related support expires or winds down and automatic stabilisers play out, for example, lower unemployment benefits and higher tax revenues
Overall, the IMF does not expect a significant increase of fiscal stimulus worldwide this year due to gradual economic recovery and winding down of previous pandemic measures.
“For three quarters of advanced economies, the fiscal deficit in 2021 is expected to shrink, as pandemic related support expires or winds down and automatic stabilisers play out, for example, lower unemployment benefits and higher tax revenues,” said the IMF report.
On Thursday, China’s finance ministry said its fiscal revenue fell 3.9 per cent in 2020 from a year earlier, while expenditure rose 2.8 per cent, underscoring the difficulties in government finances amid the coronavirus pandemic.
However, as the world’s second-largest economy bounces back from coronavirus-triggered paralysis, growth in fiscal revenue accelerated to 5.5 per cent in the fourth quarter, from 4.7 per cent the previous quarter, the ministry added.
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