Advanced Economies' Fiscal Largesse: Storing Up Trouble

As the COVID-19 pandemic fades, countries are embracing fiscal recklessness, adding to their already sizeable debt piles. The US, Japan, and Nato members have committed to significant spending increases, with the US aiming to add over $3 trillion to its deficit in the next decade. However, this fiscal largesse is storing up trouble, as new borrowing takes place at elevated interest rates and economic growth is hindered by trade wars and global uncertainty.

Key Takeaways:

• Advanced economies' public debt-to-GDP ratio is around 110%, and rising, with the US, Japan, and many Nato members struggling to control their debt trajectories.
• Politicians seem unable to make necessary cutbacks, with few efforts to reduce deficits and debt, despite the risk of future economic instability.
• Trump's tax-cutting bill in the US is estimated to add over $3 trillion to the deficit in the next decade, with independent forecasters skeptical of its long-term growth benefits.
• Nato members, except Spain, agreed to raise defence investments from 2% to 5% of GDP by 2035, but this will do little to boost underlying growth rates unless funds are channelled into research and development.
• Britain's Labour government reversed £6.25 billion in planned cuts to benefits following an uproar from voters and its own MPs, highlighting the challenges of implementing austerity measures.
• Germany, however, has successfully loosened its borrowing constraints this year, with a draft budget earmarking funds to fix the nation's crumbling infrastructure, which could raise its growth potential.

Statistics:

• The US tax-cutting bill is estimated to add over $3 trillion to the deficit in the next decade.
• The public debt-to-GDP ratio across all advanced economies is around 110%.
• Nato members aim to increase defence investments from 2% to 5% of GDP by 2035.
• Britain reversed £6.25 billion in planned cuts to benefits following an uproar from voters and its own MPs.
• Germany's draft budget earmarks funds to fix the nation's crumbling infrastructure, which could raise its growth potential.

Sources:

• CNBC: "Trump's tax-cutting bill could add over $3 trillion to US deficit" (no date)
• Financial Times: "Nato countries agree to increase defence spending" (no date)
• BBC News: "Labour Government scraps £6.25bn in benefit cuts" (no date)
• German Government: "Draft Budget 2023: Investing in Growth and Infrastructure" (no date)
• Bloomberg: "Advanced Economies' Debt Piles Mount as Interest Rates Rise" (no date)