The Pandemic and Debt

Written by: Andre Reis Silva

From: Santiago, Chile

Edited by: Anna Kissajikian

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In March 2020, the world came to a stop. We all know the story, the coronavirus spread, and everyone was told to stay home in order to prevent the dissemination of the virus. As a result of low economic activity with everyone staying home, governments all across the world were called upon to save local businesses. In the United States, for example, at the time of writing this article, there have been three multi-trillion dollar stimulus packages, with talks of a fourth one, which brought economic relief to various businesses, individuals, and organizations. With the huge sums of money being distributed by the government, it meant a huge increase in government debt.

Government debt or national debt is defined as “The public and intragovernmental debt owed by the federal government.” This value is often stated in the form of a Debt-to-GDP ratio. The GDP (gross domestic product) of a country is defined as “The total value of goods produced and services provided in a country.” Essentially, it is the amount of money a country generates. Therefore, the Debt-to-GDP ratio is the amount of debt in comparison to the GDP. For example, if a country’s GDP is 400 billion dollars, and the debt is 200 billion dollars, the country’s debt is 50%.

The economic war against COVID-19 has brought government debt to levels that the world has not seen since World War 2. According to Bloomberg, “The borrowing binge has come with a hefty price tag—$19.5 trillion last year alone, according to Institute of International Finance estimates. Still, compared to the alternative—a deep and lasting depression—that looks cheap.” 19.5 trillion dollars is a number so big, it’s difficult to imagine. With that money, you could give every human on earth 2460 dollars, and still have a couple of billion dollars left. There are plenty of entertaining things you could do with 19 trillion dollars, however, the reality of the situation is far less amusing. The global Debt-to-GDP ratio is now 123.9% in developed countries, and 62.5% in developing countries, which has gone up significantly from 2019 numbers, as you can see in the following graph provided by the International Monetary Fund.

Due to the severity of the current economic crisis, there is no simple solution. However, Investopedia claims that some measures are coming to lower the debt, including budget and spending cuts, interest rate manipulation, and higher taxes for citizens. This economic tactic has a name, austerity, where budget cuts and higher taxes are implemented so that the government can pay off debt. However, austerity is by no means guaranteed to fight the debt. According to the International Monetary Fund, as written by the Irish Times, “Most advanced economies that can borrow freely will not need to plan for austerity to restore the health of their public finances after the coronavirus pandemic, the IMF has said in a reversal of its advice a decade ago. Countries that have the choice to keep borrowing are likely to be able to stabilise their public debt by the middle of the decade without having to raise taxes or cut public spending plans, Vitor Gaspar, head of fiscal policy at the fund, told the Financial Times.” Thus, if developed countries implement debt forgiveness, or help poorer countries with fighting debt with minimal austerity, there is truly light at the end of the tunnel.