Governments around the world owe a staggering $91 trillion, which is almost as much as the entire global economy. This massive debt will eventually affect people everywhere.

The COVID-19 pandemic contributed significantly to this debt, making it so large that it threatens living standards even in wealthy countries like the United States.

Despite the urgency, politicians are not addressing the problem. They’re avoiding tough conversations about necessary tax increases and spending cuts, especially during election years. Some politicians even make promises that could increase inflation or trigger a new financial crisis.

The International Monetary Fund (IMF) recently warned that the U.S. must urgently address its persistent budget deficits. Investors are also worried about the long-term financial health of the U.S.

Around the world, rising debt levels are making investors nervous. In France, political issues have heightened concerns about the country’s debt, causing bond yields (the return investors demand) to rise.

Recent elections in France suggested that the worst fears might not come true, but investors still want higher returns to buy government debt because of increasing budget deficits. Higher debt servicing costs mean less money for essential public services or emergencies like economic crises, pandemics, or wars.

When government bond yields rise, it also means higher borrowing costs for households and businesses, which hurts economic growth. Higher interest rates lead to less private investment and make it harder for governments to borrow money during economic downturns.

Kenneth Rogoff, an economics professor at Harvard University, believes the U.S. and other countries will have to make difficult adjustments. He notes that debt is no longer cheap. In the 2010s, many believed interest rates would stay low forever, making debt seem manageable. However, rising interest rates mean higher interest payments, which is now a global issue.

Ignoring the Problem

In the U.S., the federal government will spend $892 billion this year on interest payments alone, more than its defense budget and close to its Medicare budget. Next year, interest payments will exceed $1 trillion on a national debt of over $30 trillion, nearly as much as the entire U.S. economy. The Congressional Budget Office (CBO) predicts U.S. debt will reach 122% of GDP in ten years and 166% by 2054, slowing economic growth.

Economists don’t agree on a specific debt level that signals trouble, but many think that if debt hits 150% to 180% of GDP, it will have severe economic and social consequences.

Despite these concerns, major 2024 presidential candidates Joe Biden and Donald Trump are not promising to fix the debt problem. During a recent debate, they blamed each other for worsening the debt situation through tax cuts or increased spending.

In the UK, politicians are also avoiding the debt issue ahead of an election. The Institute for Fiscal Studies (IFS) criticized the main political parties for not addressing poor public finances. The IFS director, Paul Johnson, said that after the election, the government will face a tough choice: raise taxes, cut spending, or borrow more, leading to even higher debt.

Tackling Debt Challenges

Countries trying to address debt issues are facing difficulties. In Germany, disagreements over debt limits are straining the government coalition. In Kenya, proposed tax hikes to address the country’s $80 billion debt have sparked protests, leading the president to withdraw the proposals.

Consequences of Ignoring Debt

Ignoring debt problems leaves governments vulnerable to harsh financial market reactions. In 2022, the UK experienced a collapse in the pound when former Prime Minister Liz Truss proposed tax cuts funded by increased borrowing.

France faces similar risks. After President Emmanuel Macron called a snap election, there were fears of a financial crisis if populists, who might increase spending and cut taxes, were elected. Although the worst-case scenario seems less likely now, uncertainty remains, and yields on French government bonds have risen to an eight-month high.

Karen Dynan from Harvard Kennedy School notes that financial markets can quickly become uneasy about “political dysfunction” that makes investors doubt a government’s ability to repay its debt. She warns that a major event causing market panic over U.S. debt could be something unforeseen.

The global debt situation is critical, and if not addressed, it could lead to severe economic consequences. Governments need to take action to manage their debt levels and reassure investors to maintain economic stability.