Elmaz Sabovic
The surge in debt is partly attributed to pandemic-related costs, which have swollen fiscal deficits. This mounting debt burden jeopardizes living standards even in affluent economies like the United States.
As debt loads escalate globally, investors grow increasingly uneasy. In France, political instability has heightened worries about the country’s debt, leading to soaring bond yields demanded by investors.
While recent snap election results may have eased some market fears, investors continue to demand higher yields for government debt due to widening gaps between spending and tax revenues.
IMF warns of the growing U.S. debt
Despite the urgency of the situation, politicians worldwide, facing elections, are largely sidestepping the issue.
They hesitate to be forthright with voters about the necessary tax increases and spending cuts required to address this borrowing deluge. In some cases, they even make extravagant promises that could exacerbate inflation or potentially trigger a fresh financial crisis.
The International Monetary Fund (IMF) recently reiterated its warning that the chronic fiscal deficits in the US demand immediate attention.
“These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed,” stated the agency in its Mission Concluding statement on June 27.
The consequences of the growing U.S. debt could be severe
The implications of this debt dilemma are far-reaching. Higher debt servicing costs mean reduced funding for critical public services and hinder responses to crises such as financial meltdowns, pandemics, or wars.
Moreover, rising government bond yields, which influence other debt pricing (such as mortgages), translate into higher borrowing costs for households and businesses, ultimately impeding economic growth.
As interest rates climb, private investment declines and governments become less equipped to borrow and respond effectively during economic downturns.
Addressing U.S. debt challenges necessitates tough choices: tax hikes or cuts to essential programs like social security and health insurance. However, many politicians shy away from discussing these weighty decisions despite their potential impact on people’s lives.
