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Inside Out & Outside In
OpinionComment
David Dodwell
David Dodwell

Outside In | Our complacency about sky-high government debt will cost our children dearly

  • With interest rates rising, public debt still high and governments needing to keep on spending, the least painful path to sustainable debt is to engineer strong growth
  • But this is easier said than done. Instead, we risk leaving the next generation to pay off our debts

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A pedestrian walks near the Royal Exchange and the Bank of England in the City of London on December 28, 2020. Magical arithmetic has helped central banks worldwide arm-wrestle the pandemic recession with negligible debt-service costs. Photo: AFP
David Dodwell

There is an old saying that if I owe you £1,000, I have a problem; but if I owe you £1 million, the problem is yours. By this measure, there are today an unprecedented number of people facing problems on an unprecedented scale.

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Global debt rose to US$296 trillion in the middle of last year, amounting to around 350 per cent of the world’s gross domestic product. Government, corporate and household debt levels are at their highest in decades. The International Monetary Fund says 2020 saw the largest surge in debt since the second world war.

Yet few economists, and few in power, seem concerned. Among leading US economists, Olivier Blanchard has said that “public debt may have no fiscal cost”, while Jason Furman and Lawrence Summers also said the “risks associated with high debt levels are small relative to the harm cutting deficits would do.”

In Britain, Frank Van Lerven at the New Economics Foundation claims that: “Inflation and its implications for debt servicing costs shouldn’t be taken lightly. But for now, these issues are manageable, if not solvable [ … ] there are other more pressing issues to keep us up at night.” In Britain, that is probably true with Brexit, a bull-in-a-China-shop prime minister and Covid-19 to wrestle with.
Setting aside whether inflation is today more transitory than structural, as statistics struggle to take proper account of the pandemic recession, and in spite of the undisputed intelligence and authority of so many international economists, such debt numbers fill me with angst.

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Along with World Bank economists M. Ayhan Kose, Franziska Ohnsorge and Naotaka Sugawara, I sense “history suggests caution”.

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