In recent years, the world has faced an unprecedented global debt crisis, which has not been eased by the challenges posed by the COVID-19 pandemic. The latest update to the World Debt Database reveals worrying trends. Global debt has fallen slightly for the second year in a row, but remains significantly higher than pre-pandemic levels, which were already rising. Total debt is equivalent to 238% of the world’s gross domestic product (GDP), an increase of 9% from 2019, reaching a staggering $235 trillion in US dollars. This is a stark reminder that our nation’s policymakers must remain steadfast in their commitment to maintaining debt sustainability.
The continued high level of public debt is particularly worrying. Even though the global economy has shown signs of recovery since 2020, public debt has refused to fall. Governments around the world increased spending in response to the pandemic, and budget deficits remained high. These deficits were necessary to promote economic growth and respond to rising food and energy prices. But as a result, public debt has increased by just 8 percentage points as a share of GDP over the past two years, easing only half of the pandemic-induced surge.
The situation was slightly different for private debt, which includes household debt and non-financial corporate debt, with an accelerated decline of 12 percentage points as a share of GDP. But even this decline has not completely erased the debt accumulated during the pandemic.
Before the pandemic, the global debt-to-GDP ratio had been on an upward trend for decades. Global public debt has tripled since the mid-1970s, reaching more than $91 trillion, or 92% of GDP, by the end of 2022. Private debt followed a similar trajectory, tripling between 1960 and 2022 to 146% of GDP, or nearly $144 trillion.
China has played a pivotal role in raising global debt levels. Although China’s debt as a share of GDP is now comparable to that of the United States, and its total debt of $47.5 trillion remains lower than that of the United States, it is essential to note that China’s role in this context is important. Furthermore, China has the largest share of non-financial corporate debt in the world at 28%.
Low-income developing countries have also seen significant increases in debt over the past two decades, although they started from low levels. These countries face unique challenges despite having relatively low debt levels compared to developed and emerging economies. Debt has accumulated rapidly since the global financial crisis, and more than half of these countries are at high risk of falling into a debt crisis. Additionally, sovereign debt in around one-fifth of emerging markets is trading at distressed levels.
To address these pressing concerns, governments around the world must take immediate steps to reduce debt vulnerabilities and reverse alarming long-term debt trends. Regarding private sector debt, the debt burden of households and non-financial enterprises and the associated financial stability risks need to be closely monitored. Regarding public debt vulnerabilities, there is a need to establish a reliable fiscal framework to guide the balance between spending needs and debt sustainability.
For low-income developing countries, strengthening their capacity to collect additional tax revenues is essential. Countries with unsustainable debt levels need a comprehensive approach that includes fiscal discipline and debt restructuring under the Group of 20 Common Framework, a multilateral mechanism for canceling and restructuring sovereign debt.
Importantly, reducing the debt burden will free up public finances, encourage new investment, and ultimately boost economic growth in the years to come. Implementing labor and product market reforms at the national level can provide essential support to this goal, as can international cooperation on taxation, including carbon taxes, thereby reducing the strain on public funds. There is a possibility that
The global debt crisis is a challenge that requires collective action, sound fiscal policy, and a commitment to sustainable economic growth. This is a challenge that cannot be ignored, as the well-being of current and future generations depends on our ability to manage and mitigate the risks posed by this growing debt burden.
Devasha Verma is pursuing a Master’s degree in International Relations from the Faculty of Social Sciences, GNDU Amritsar. He has worked with the Government of Punjab as a field surveyor for various projects for land acquisition for social purposes.
