As presidential and general elections are held in 76 countries around the world, there are growing concerns that major countries, including the United States and the United Kingdom, will engage in excessive economic stimulus. If major countries simultaneously print government bonds to raise funds, the government’s interest costs will increase, which can increase not only the economic growth of the country in question but also the instability of the global economy and international financial markets as a whole. In particular, analysis suggests that the risk of increased government debt will increase in countries where political parties advocating populist policies come to power through elections.
The British Financial Times (FT) expressed concern that the ratio of government debt to gross domestic product (GDP) around the world this year will be the highest ever except for 2021, when the novel coronavirus infection (COVID-19) was at its peak. In Germany, Europe’s largest economy, the Olaf Scholz government spent a lot of money on green policies, so late last year that the Constitutional Court ruled that the policy was unconstitutional. This has significant aftereffects, including the cancellation of some related budgets and increases in various taxes.
On the 9th, the FT reported, citing statistics from the International Finance Institute (IIF), that this year’s government debt-to-GDP ratio is expected to be the highest ever except for 2021.
The United States, the world’s largest economy, plans to issue about $4 trillion (about 5,280 trillion won) in government bonds this year. It is an increase of more than 30% compared to last year when it was $3 trillion. Major presidential candidates from the ruling Democratic Party and the opposition Republican Party are also proposing aggressive economic stimulus measures one after another. In particular, former President Donald Trump, who has the highest approval rating in the Republican Party, announced his intention to permanently maintain the personal income tax cut that is set to expire at the end of 2025. Treasury Secretary Janet Yellen then criticized, saying, “Continuing tax cuts without finding new financial resources will heighten concerns about the fiscal deficit.”
The UK is also expected to issue the second largest number of government bonds this year after 2020. Even British Prime Minister Rishi Sunnack, a former finance minister who was cautious about tax cuts, has recently launched a ‘tax cut drive’, saying, “We will compensate (voters’) hard work with tax cuts.” It is interpreted as a strategy to raise approval ratings by cutting taxes ahead of the early general election to be held as early as the second half of this year (July-December).
The net issuance of government bonds in the Eurozone (20 countries that use the euro) is also estimated at 640 billion euros (about 923 trillion won), an 18% increase from a year ago. Accordingly, the FT reported that the government bond issuance volume of the world’s top 10 largest economies this year is estimated at 1.2 trillion euros (about 1,732 trillion won).
The market is concerned that such actions by major countries will delay the recovery of the global economy, which is already suffering serious blows due to the prolonged war in Ukraine and the war between Israel and the Palestinian armed group Hamas.
When government bond issuance increases and bond prices fall, interest rates rise. A significant negative impact is expected as the interest burden on each economic entity, including the government, companies, and individuals, increases. Jim Sielinsky, head of global fixed income at U.S. asset management company Janus Henderson, warned that the increase in bond issuance by each country “could serve as a cause for serious concern in the international financial market over the next 6 to 12 months.”
Professor Christopher Sims of Princeton University, winner of the 2011 Nobel Prize in Economics, also said at the 2024 Annual General Meeting of the American Economic Association (AEA) on the 6th, “The current situation in the United States is similar to that of 1970, when inflation was calmed down by temporary tightening monetary policy without fiscal reform.” “It’s similar to the 1990s,” he said. “Due to the fiscal deficit, the U.S. government’s interest costs are increasing faster than ever. “If Congress and others do not pay attention, inflation will recur,” he pointed out. He said that inflation can be caused by fiscal policy and called for urgent government efforts to reduce debt.
In Germany, there are already signs of high inflation due to increased government debt. Local economic media ‘Handelsblatt’ reported on the 9th that air ticket prices will also rise as the Scholz administration decides to increase the air traffic tax from May to resolve the unprecedented budget crisis.
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.