Global Debt Problem in Developed Countries and Possible Strategies

Issue

Government debt has become a concern for many developed countries in recent years. Economists, officials, and other stakeholders fear that the government debt will increase and become an unbearable burden for younger generations. Such issues as financial crises, aging populations, and quite inconsistent tax policies contribute greatly to the problem. The recent examples of Greece and Ireland show what exactly can happen to countries that do not address their national debt properly. At that, austerity policies, increasing taxes, and decreasing government spending are also seen as insufficient and sometimes harmful strategies. Hence, a comprehensive and effective strategy is needed.

Background

• Governments often borrow money, which is regarded as a common practice, and many analysts claim that it can “help stimulate the economy” during a recession or can be used as a long-term investment (Nelson, 2013, p. 3). For instance, it is possible to use the money to innovate some industries, which will contribute to the development of the economy in the long run.
• The growth of sovereign debt of major developed countries is significant. For example, the national debt of G7 countries (the USA, Canada, the UK, Japan, Italy, Germany, and France) increased from 84% of GDP in 2006 to 125% in 2012 (Nelson, 2013).
• Two major opinions on the way to address national debt exist, and there is still no certainty about their effectiveness or even appropriateness in different settings. Some analysts claim that policies of fiscal stimuli should be used, and governments can borrow to facilitate the economic growth and be able to repay their debts, while some researchers state that policies of austerity are more effective since they can help countries avoid the situation Greece found itself in when the country could not borrow more funds to repay the debts (“Sovereign doubts,” 2013).
• Some countries start trying to balance their national debt and GDP. For instance, Canada is considering maintaining its national debt at about 33% of GDP (Curry, 2016). European countries plan to reduce their expenditure and increase taxes (“Sovereign doubts,” 2013).
• Japan, Greece, and Portugal saw the most significant increase in national debt during the past decade (from 166% to 227%, from 99% to 175%, from 58% to 129% respectively) (Patton, 2014). The USA is in a more favorable position as its debt grew from 63% to 102% while the country has a long repayment history, which makes it a safe borrower (Patton, 2014).

Economic Analysis

A number of aspects should be taken into account

• It is necessary to note that the country’s position is favorable due to its long history of repayment and financial stability. Thus, the US bonds are still rather low as the country’s deficit is not as alarming as it was in Greece or some other European countries (Nelson, 2013). Notably, even though the financial housing crisis originated in the USA, the country’s bonds were still quite high, which shows a significant level of trust among investors. Importantly, the country is rated fifth among states that are less likely to default in 10 years (Nelson, 2013). The country’s ability to innovate and invest in its growth shows that fiscal stimuli policies can be a safe solution for Americans.
• At that, other countries’ attempts to address their national debts may have a negative effect on the USA. The case of Greece made many countries try to balance their national debt and GDP. Many European countries chose austerity policies to address their sovereign debt issues, which means that these countries will buy less from the USA. Clearly, this may slow down the country’s economic growth.
• The aging population of the country is making the load on the budget more substantial, which may require stricter austerity measures that are unpopular and may result in slow economic growth. At the same time, thoughtful immigration policies can reduce the burden and help the country address deficit issues.

The policy addressing the national debt could potentially address the problems by

• The policy involving the collaboration of all the major developed countries can potentially facilitate the growth of their economies as the outcomes of austerity measures will be softened in countries with larger debts while economic growth will not slow down significantly in countries with smaller sovereign debts (Nelson, 2013).
• Thoughtful and balanced austerity measures can help in addressing short-term issues and reduce the national debt. At the same time, fiscal stimuli policies will also be widely used to facilitate the economic growth of the country.

Risk Analysis

• In the vast majority of cases, austerity measures are unpopular in society, especially when it comes to American society. After the elections in the country, major parties will be less concerned with the ratings and popularity of their proposed policies among voters. However, all political forces will still be reluctant to introduce unpopular measures (Patton, 2014). Furthermore, Americans may oppose the austerity measures introduced, and the government may need to limit significantly the number of steps they could develop.
• Countries with smaller national debts can be reluctant to coordinate their fiscal policies with states having larger sovereign debts. This unwillingness may be increased due to some internal political and social issues, as well as geopolitical trends.
• The closer collaboration with international financial institutions can also be difficult to achieve as many states will be unwilling or even unable to provide all the necessary data.

Option Analysis

• Fiscal consolidation: The government can increase taxes and/or cut government spending to decrease the country’s deficit.
• Debt restructuring: The government can negotiate with borrowers and have a lower interest, or an extended repayment period, as well as the lowered balance of the loan.
• Inflation: This option presupposes the use of inflation to reduce the national debt’s real value.
• Growth: The government can focus on facilitating economic growth, which will reduce the sovereign debt “relative to GDP” (Nelson, 2013, p. 12).
• Financial repression: The government can make domestic investors purchase governmental bonds at lower interest rates.

Assessment of the Proposal

Strengths

• The strategy described in the article in question can be very effective in addressing national debt issues. It is clear that global debt is increasing and can potentially affect many countries in the world. It can result in another global financial crisis that can be difficult to overcome since there will be fewer investors (Nelson, 2013). Obviously, the combined effort of major developed countries is needed to come up with an effective solution.
• The strategy also addresses the need to communicate and collaborate more effectively in the global arena. Thus, countries should share their economic and financial data more efficiently. Transparency and clarity can help countries address potential issues and avoid numerous difficulties.

Weaknesses

• The major downside of the strategy proposed is its lack of details. The author states that the collaboration of G20 countries will be a possible solution (Nelson, 2013). However, the author does not provide any suggestions concerning actual patterns of such collaboration. More importantly, the ways to persuade other states to collaborate are unclear. Countries with insignificant sovereign debt are unlikely to engage in any activities that could limit their economic growth (even temporarily).
• Furthermore, the strategy is rather hard to implement as countries will still focus on their national interests rather than some global issues. Even when it comes to sharing information, it can be regarded as the disclosure of important data that can undermine the country’s national security. Historically, countries have different political forces that compete. This competition can make global collaboration concerning global debt impossible.
• Nelson (2013) also mentions that fiscal austerity is necessary to address the US sovereign debt while global collaboration should also be negotiated and achieved. Nonetheless, the author does not reveal particular austerity measures that can be employed. Clearly, there are various options, but not all of them can work for the USA under the existing circumstances.

Personal Recommendations

• The strategy under consideration is developed for the US Congress. Nelson (2013) notes that Congress should use the options provided. Nonetheless, the issue requires a more holistic approach. It is essential to develop the strategy that will be employed by the US President, Congress, and other representatives of the country in the global arena (the US representative in the UN Economic and Social Council and General Council, ambassadors, and so on). Clearly, the strategy for each of the mentioned people and institutions should be consistent with the major goals mentioned in the article.
• The strategy provided in the article in question can be very effective, but it should be far more detailed to become viable. The threefold strategy will include three major directions that should involve negotiations with G20 countries, negotiations with the IMF, and fiscal austerity policies. Each of the directions should be further developed into a sound program with particular steps to implement.
• The USA should develop some fiscal austerity policies. Researchers note that the country has mainly used the fiscal stimuli approach that presupposes little focus on the debt itself but concentrates on the development of the economy (“Sovereign doubts,” 2013). It is stressed that this solution has turned out to be effective, and the country’s debt is not increasing at the same horrific pace as the national debts of Greece or Japan. However, it is time to find a balance between fiscal stimuli and austerity. Therefore, it can be beneficial to introduce some reforms of the tax policy (some increase in taxes can be in such industries as gambling and alcohol beverages production).
• It is also critical to increase trade relations with countries that do not utilize austerity measures. Nelson (2013) states that major European countries start developing a variety of austerity policies, which will have an adverse effect on the US economy since these countries will buy less from the USA. To address the potential losses, the government should look for new partners or rather develop relations with the existing ones. Further work on relations with such countries as China, Cuba, Brazil, India, and others should become one of the priorities of the American government.

References

Curry, B. (2016). Budget watchdog warns of deteriorating provincial finances. The Globe and Mail.

Nelson, R.M. (2013). Sovereign debt in advanced economies: Overview and issues for Congress.

Patton, M. (2014). The seven most indebted nations. Forbes.

Sovereign doubts. (2013). The Economist.