Ritika Janiya
The International Monetary Fund recently raised an alarm bell: global debt is growing at the fastest rate in history and threatens the world economy at large. Government debt worldwide stands at $100 trillion by the end of 2024, meaning the corresponding debt liabilities would be about 93% of world GDP. According to experts’ warnings, if this trend goes on, debt levels are expected to reach an alarming level of 100% of the global Gross Domestic Product (GDP) by 2030.
A Growing Problem
These countries borrow their money for funding programs and services, but borrowing too much gets them into trouble. As the IMF warns, if these kinds of countries fail to curtail debt, they might face financial disasters, which could then be contagious among other nations. It is maybe from this fact that too many countries are in debt that the threat to cause a world financial crash emanates.
It is a global problem, but the IMF did point out a specific country during the remarks: the United States. This country is one of the wealthiest in the world, and yet the budget deficit is likely to exceed 6% of its GDP this year. A budget deficit, simply stated, is the difference between how much money the country spends and how much it brings in through taxes and other sources of income. Even with such a strong economy, the United States is continuing to accumulate debt, and that may have a cascading effect on all nations. Should larger nations like the United States be unable to reign in their debt levels, it might undermine smaller countries striving hard to cut their own.
Why is the Debt Growing?
The many reasons why global debt is growing so fast include the COVID-19 pandemic, arguably the most significant contributor. Governments worldwide responded quickly by shielding their citizens from the economic impact of lockdowns. They spent trillions of dollars on emergency programs that helped people and businesses survive. This included money for those who lost jobs and support that kept companies afloat.
However, just when countries were starting to find their footing from the pandemic, the 2022 Russia-Ukraine war sent a fresh wave of financial trouble, especially in Europe. The war greatly increased energy prices that injured several economies and forced governments to spend more to cushion their citizens from the effects. This, once again, increased debt.
Besides these immediate challenges, more long-term ones are also emerging. Aging populations are quickly becoming the norm for many countries as more citizens retire and fewer enter the workforce. This puts pressure on national budgets due to the increase in the cost of healthcare and pension costs. As this plays out, nations worldwide are investing in green energy schemes that are very costly to check climate change. Apart from this, some nations have increased defense spending due to the ending of the post-Cold War era of peace.
What needs to be done?
The IMF recommends that countries should balance their budgets either through reduction in spending or increase in taxation. The Fund believes that countries must curb their fiscal deficits by 3% to 4.5% of their GDP within medium term to keep the level of debt within check. The IMF flatly declares delay would come at perilous cost. Waiting too long to fix their budget problems could mean much higher costs and risks down the line. Worse still, if it were to coincide with a financial shock—the sudden rise in interest rates, say, or another global crisis—the situation could quickly spiral out of control.
The IMF has also requested countries to cut on non-economical and wasteful expenditure, such as subsidies which are basically governmental payments made for supporting industries or companies. Governments should target the less efficient uses of funds rather than reducing investments in productive ones, like education or infrastructure schemes, that would prove to be a good recipe for success in the near future.
Europe in Focus
The report by the IMF comes at a critical time for the European Union, since a few nations in the EU are still spending more than they earn and will put them on an unsustainable path. They must present their debt-reduction plans to the European Commission soon. Under new EU budget rules, countries will have between four and seven years to bring their debt under control and start reducing it.
This won’t be easy, especially for countries already with a heavy debt burden. Still, the IMF believes that this could lead to more stable finances if countries do the right things.
Why Should We Care?
I mean, “Why do I care about debt around the world?” It is probably because very hurting debt binds everyone. An example of such a consequence would be, for instance, if a country like the U.S. is having trouble paying down its debt-it causes interest rates to go up around the world. That could make mortgages, car loans, and just about any kind of loan more expensive; thereby, people would find it tougher to borrow.
If governments are forced to raise taxes or cut back on services, it can affect the lives of ordinary citizens.
Global debt also hurts the economy in a variety of ways. Too much latitude for lavish financial giving to pay back debt leaves little money for schools, healthcare, and infrastructure-dry wells for jump-starting healthy economic growth and job hiring.
The Way Forward The IMF is now proclaiming that the world needs to act now to avoid some sort of future debt crisis. Nobody likes the pain of cuts in spending and rising taxes, but that might be what is required to avoid a much worse financial catastrophe in the future. Governments need to find ways to reduce their deficits without stripping vitality from their economies. If they can achieve a balance, they will stabilize their finances and usher in a better future for the global economy.
