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Despite Escalating Debt, U.S. Federal Government Finds Itself in Unfavorable Company

U.S. Federal Government (Credits: ThoughtCo)

Tobias Adrian, Vitor Gaspar, and Pierre-Olivier Gourinchas from the International Monetary Fund (IMF) highlight a concerning trend: public debt relative to gross domestic product (GDP) has risen sharply in recent years, affecting both developed and developing economies.

By 2028, public debt is anticipated to hit 120 percent of GDP in advanced economies and 80 percent in emerging and middle-income nations. This escalation in public debt is attributed to a prolonged period of low interest rates, which lessened the urgency for fiscal tightening, allowing government deficits and debt levels to increase.

U.S. Government (Credits: Brookings Institution)

The situation was further exacerbated by the COVID-19 pandemic, which led to economic disruptions worldwide. In response, governments rolled out extensive emergency support measures mainly funded through borrowing.

However, as interest rates climb, the debt servicing cost also rises. Yet, governments seem to continue borrowing as if the economic landscape remains unchanged.

This situation poses a greater challenge for countries deemed riskier, which face higher borrowing costs. According to António Guterres, the United Nations Secretary-General, African nations, for example, endure borrowing costs four times higher than the United States and eight times higher than the most affluent European countries.

U.S. Embassy (Credits: U.S. Embassy & Consulates in China)

Guterres’s warning came with the release of the report “A World of Debt: A Growing Burden to Global Prosperity” last summer, which pointed out that nearly 40 percent of the developing world, encompassing 52 countries, is grappling with severe debt difficulties.

By 2022, global public debt reached an alarming $92 trillion, with interest payments increasingly encroaching on funds that could otherwise be allocated to various essential expenditures, particularly in developing countries.

This high level of public debt limits the financial capacity for other critical investments, including private sector initiatives essential for job creation and wealth generation.

The scenario paints a grim picture of nations’ economic growth and development prospects, especially those in the developing world, hampered by unsustainable debt burdens.

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