Rising debt problem: The global economy’s elephant in the room

Singapore — Senior Minister Tharman Shanmugaratnam recently shed light on the rising debt of countries around the world, calling it a “very serious issue” that nations must address.

The Covid-19 pandemic has drastically altered society almost overnight with its social distancing precautions as a primary means to combat the spread of the virus. As nations rush to get a vaccine out in record time, the fight against Covid-19 has mainly been through preventive measures.

However, as the world waits for a safe and effective vaccine, countries have had to find a way to address the economic devastation caused by the pandemic. According to a report by the World Bank, the pandemic has pushed the world to the worst economic recession since World War II.

In an attempt to resuscitate collapsed economies, the answer that many nations around the world have turned to is government spending. However, in order to do so, many governments have had to resort to borrowing money — a move that increases debt.

According to a recent report by CNBC, Mr Tharman addressed this problem on the opening day of the virtual Singapore Summit on Monday (Sept 14), saying that though borrowing is a “sensible economic strategy … the big issue in the next decade is how to ensure that debts are sustainable”.

He warned that going too deep into debt could negatively impact economic growth in the long run and argued that current economies cannot depend on rapid economic growth and inflation to de-escalate debt.

“Rapid growth is no longer possible, these are now aging societies, productivity growth is much lower than before … and inflation is not going to be tolerated by older societies,” he said. “They may be tolerated when societies are young and everyone’s incomes are going up, it’s not going to be tolerated now.”

Mr Tharman also argued that interest rates that are currently low will eventually rise to normal levels again, and that this would bring up the debt financing costs.

“It’s a very serious issue,” he said, stressing the need for countries to employ a balance of methods to address the economic problem. “You’re going to need fiscal reforms, not simply cutting down on spending but quality spending and ways of raising revenue that don’t dent growth.” /TISG