By Tom Fairless
FRANKFURT -- Governments around the world are loading up on
debt, taking advantage of record-low borrowing costs to extend a
long economic expansion and invest for future challenges.
Economists warned a decade ago that pushing public debt above
about 90% of gross domestic product could hurt growth and increase
the risk of crises.
Now they aren't so sure.
In a world of ultralow interest rates, some say higher public
debt levels are feasible, even desirable. If sovereign-bond yields
remain below economic growth rates, governments should be able to
issue debt without having to pay for it later, argue economists
including Olivier Blanchard, former chief economist of the
International Monetary Fund.
Seizing the opportunity, governments in France, Italy, Spain and
the U.K. are penciling in large budget deficits for the coming
years that will push their national debts close to 100% of GDP or
much higher. Japan recently announced a $120 billion fiscal
stimulus to shore up growth, even though public debt is more than
double the nation's annual economic output.
The U.S. has embarked on a borrowing boom, driving the annual
budget gap above $1 trillion and total government debt above 105%
of GDP.
But the shift is drawing censure from some regulators and
international officials, who warn that high public debt still
carries risks.
France's growing public debt "is a cause for concern, since it
does reduce the room for fiscal maneuver in the event of a downturn
in the economy," European Central Bank President Christine Lagarde
told a French newspaper last month.
The European Commission, the European Union's executive arm,
warned eight member countries in November that they risked
breaching the bloc's rules, which require countries with debt above
60% of GDP to gradually reduce it.
Traditionally, economists worried high public debt would soak up
funds that would otherwise be used for private investment, thereby
lowering a nation's capital stock and productive capacity while
driving up interest rates.
Today though, very low interest rates globally suggest ample
capital relative to demand.
"These low interest rates are telling us that the funds
available for private investment aren't especially scarce, so the
costs we traditionally associate with high government debt aren't
as high as previously thought," said Karen Dynan, former chief
economist at the U.S. Treasury.
Higher public debt could have advantages, some economists say.
It could satisfy a growing demand among investors for safe assets.
It could substitute for a lack of policy ammunition among central
banks, which have already cut interest rates close to zero or
below. It could finance public investment in infrastructure,
education, research and development, and climate-change mitigation,
which could elevate potential growth.
However, some economists warn that low interest rates reflect
slow growth, which makes it harder for countries to escape from
under a mountain of debt. Countries with high debt are also less
able to respond forcefully to economic shocks by increasing
spending or cutting taxes.
"Over history, if high debt was not problematic, countries would
be increasing their debts, because that's the easiest thing in the
world for politicians," said William Gale, senior fellow at the
Brookings Institution in Washington, D.C.
An IMF study published last month found that advanced economies
face a substantially higher risk of entering a crisis if sovereign
debt owed to foreign creditors exceeds 70% of GDP. For
emerging-market economies, the threshold is 30%, according to the
report, which examined more than 400 crisis episodes in 188
countries between 1980 and 2016.
Crucially, the researchers found that government bond yields
often remain low for long stretches before shooting up at the onset
of a crisis. That suggests governments shouldn't rely too heavily
on current low borrowing costs.
"Governments should be wary of high public debt even when
borrowing costs seem low," the researchers wrote.
The two European economies with the slowest economic growth
rates over the past decade, Italy and Greece, started out with the
highest public debts, notes Carmen Reinhart, a Harvard University
economist. Ireland, which entered the crisis with low government
debt, was quick to bounce back, she said.
Ms. Reinhart and Harvard economist Kenneth Rogoff co-wrote an
influential 2010 paper that found countries with public debt above
roughly 90% of GDP typically had slower economic growth.
The paper, which was used to justify austerity policies in
Europe, examined data from 44 countries over about 200 years. It
found that median growth rates were 1% lower than otherwise for
advanced economies with public debt over roughly 90% of GDP.
Ms. Reinhart and Mr. Rogoff say their paper didn't forecast an
immediate impact once government debt rises above a certain tipping
point.
"Having debt rise from 89% to 90% is no more discrete an event
than having your cholesterol level rise from 199 to 200, or driving
your car at 56 miles an hour in 55 mph speed limit," said Mr.
Rogoff. "There is no sharp discontinuity, and we never stated
otherwise."
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
February 16, 2020 10:14 ET (15:14 GMT)
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