Is it a mistake, or even a sin, for the government if the public deficit reaches 5.6% of GDP in 2023 and if the debt stock is close to 110% of GDP in 2024? The current controversies over the budgetary savings to be made or the possible increase in this or that tax could lead one to believe so. André Cartapanis explains why things are more complex than they seem.
First, for several years now, public deficits have been the result of many factors, only a part of which has been driven by budgetary choices. This is obviously the case for systemic shocks such as “COVID debt” or “debt returning inflation” or cyclical factors that have a direct impact on tax revenues. There is no trace of a shameful disease: these deficits are largely exogenous and were unavoidable.
The inevitable rule of sustainability
Secondly, the acquisition of treasury bills and the refinancing of matured debt are voluntary, which obviously differentiates them from taxation. Acting on their own behalf or on behalf of their clients, if financial investors acquire such assets, it is because they have the liquidity or assets to do so and because they have a micro-economic interest in them. The increase in debt and the increase in the assets in which it is invested are two sides of the same coin. And if financial wealth increases, debt will also have to grow at the same rate. No trace of shameful disease again.
However, to say that debt is not a shameful disease linked to sinful or irresponsible government behaviour does not mean that it is limitless. However, it must be sustainable. In contrast to corporate equity financing, corporate government debt and corporate bond debt require the payment of interest, the real burden of which depends on the nominal growth of the economy over the maturity of the debt. Hence the famous sustainability rule, where the interest rate paid must be less than or equal to the rate of economic growth in order for the borrower to be able to bear the debt burdens and maintain investor confidence.
Debt to mitigate the scale of the challenges ahead
These few remarks, of an elementary nature, serve to highlight three conjectures that are too often overlooked in the public debate on debt. On the one hand, given the climate transitions to be financed and geopolitical tensions, the global economy will inevitably be affected by new global shocks, backed by growing uncertainty. Recourse to the States and the increase in debt then seem inevitable.
On the other hand, the continued upward trend in income and wealth inequality on a global scale should result in a sharp increase in financial wealth and therefore in the acquisition of securities, public or private, which is the opposite of global debt. Finally, debt sustainability will require support for growth and, above all, for public investment, which seems incompatible with the maintenance of relatively high interest rates and the continuation of the monetary policies currently being pursued by central banks. Far from being a pathology or a shameful disease, debt could thus mitigate the scale of the challenges to be faced.
