Investing in inclusive & resilient growth is the best way to restore prosperity & address public sector indebtedness after the pandemic, even if it means a temporary rise in the level of public debt/GDP.
The unprecedented government response to the global pandemic has pushed public debt in many countries to historic highs, relative to output. As the focus shifts from rescue to recovery, there are calls for further spending to enable economic recovery post-COVID-19, even though fiscal deficits are already large, recognising that monetary policy alone cannot continue to support global growth. Additional public investment will be needed to boost productive capacity, as well as provide a short-term economic stimulus and absorb private desired saving.
Despite the recognised need for fiscal stimulus, the big increase in borrowing and hence government debt has raised concerns about debt sustainability, and potential limits to governments’ additional room to borrow. Excessive public indebtedness entails risks. Managing the public finances well over the long term reduces vulnerability to future debt crises. So should we be worried, and should governments start to plan the next round of tax increases and spending cuts to restore fiscal health?
This policy brief assesses the arguments for and against fiscal expansion and rapidly rising public debt as a means to invest in comprehensive wealth. It finds that although there are costs associated with increased public indebtedness, for most countries able to borrow in their own currency these do not currently outweigh the benefits. We set out clear evidence that sustainable, inclusive and resilient growth is the best way to address public sector indebtedness over the medium term; and that the appropriate level of debt/GDP depends on the economic context.