The British economy is expected to sink 11.3% this year, the most significant contraction in more than 300 years. It will borrow almost 400 billion pounds ($526 billion) in the financial year 2020/21 that started last April.
It’s the biggest public deficit since World War Two and represents 19% of the GDP. The previous year, the borrowing was just 2.5% of GDP.
The numbers, which reflect the country’s coronavirus stimulus, were announced this Wednesday by the government of the world’s sixth-largest economy. But this is not an isolated case.
According to the Institute for International Finance (IIF), the pandemic pushed overall global debt (public and private) over $272 trillion in the third quarter and, by the end of the year, it’s expected to reach $277 trillion, a record.
This is a direct consequence of government spending to support consumers and businesses during the coronavirus crisis.
This year alone, as of the end of September, the world added $15 trillion in the debt pile, half of it by governments.
In an interview with CNBC last week, Sonja Gibbs, IIF’s managing director of global policy initiatives, said this scenario represents a growing risk to investors from the government bond market.
He also said that developed countries, in particular, are facing slow growth while the debts are rising. And they can find themselves trapped with low-interest rates indefinitely.
This year, the UK and China joined Germany, Japan and other European countries in selling government debt with a negative yield.
This means the countries are being paid to borrow money, and investors will get back slightly less than they paid for the bonds, which Gibbs called a “market distortion.”
Developed countries’ overall debt rose to 432% of GDP in the third quarter, from 380% at the end of 2019, says the IFF report, whose members include over 400 banks and financial firms worldwide.
Emerging market debt-to-GDP was about 250% in the third quarter, with China reaching 335%.
The U.S. is on track to hit $80 trillion in overall debt this year, $9 trillion more than 2019.
Considering only the public sector, America’s national debt reached $26.9 trillion in September, from $23 billion in February, mainly because of its response to the pandemic.
The federal debt is now almost the size of the entire U.S. economy, something that hasn’t happened since World War Two.
The data is from the Treasury Direct and represents the gap between what the government spends and collects in taxes.
It’s expected to rise to $45 trillion in 2024 and $78 trillion in 2028.
The solution? It’s not clear.
Some defend that the government should cut expenses immediately. Others that we should put aside debt concerns for now and keep spending to help the economic recovery.
A second stimulus bill has been discussed in Congress for months. The Democrats approved a $3 trillion package in the House, but the Senate, controlled by Republicans, rejected the bill.
Democrats made a $2.2 trillion counteroffer, but Republicans don’t want to spend more than $500 billion.
It’s until unsure if a new relief deal will be approved, increasing the US federal debt even more but aiming to boost the weak economy.