by Na Juseok
Published 14 May.2020 11:30(KST)
[Asia Economy Reporter Naju-seok] Angel Gurria, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), expressed concern that the excessive debt burden from governments' money-printing fiscal policies "will eventually come back to haunt us."
On the 13th (local time), Secretary-General Gurria stated in an interview with a British media outlet that governments around the world are increasing debt such as government bonds by implementing stimulus measures to mitigate the economic shock caused by the novel coronavirus infection (COVID-19).
He pointed out, "Countries are already heavily indebted and are further increasing their debt," adding, "Even if the economy tries to take off again, its wings will become heavier."
He particularly warned that the burden on governments could increase depending on economic conditions. Governments may incur additional debt in the process of providing bailouts to struggling companies or offering guarantees to extend loan maturities for businesses.
The International Monetary Fund (IMF) has already projected that due to increased government spending caused by COVID-19, global public debt will rise from 83.3% of global gross domestic product (GDP) to 96.4% this year. In particular, advanced economies are expected to see an increase from 105.2% to 122.4%.
Nevertheless, governments have concluded that fiscal input is inevitable to alleviate the economic shock caused by COVID-19. Jerome Powell, Chair of the U.S. Federal Reserve (Fed), emphasized on the same day, "Although fiscal input demands a high price, it is well worth it if it can prevent long-term economic damage and lay the foundation for economic recovery."
Governments have already announced unprecedented large-scale stimulus packages, increasing the scale of debt. The U.S. announced plans to raise $2.999 trillion (approximately 3,683 trillion won) from the private sector in the second quarter of this year. This follows an astronomical stimulus package approaching $3 trillion, with additional borrowing planned to secure funds. While the scale varies by country, record-breaking stimulus packages are being rolled out.
The problem is that it is currently difficult to gauge whether the enormous debt can be repaid. Secretary-General Gurria said, "I do not trust claims of a V-shaped recovery (an economic forecast predicting a sharp rebound after a steep decline due to COVID-19)," adding, "I believe it will be a U-shaped recovery (an economic outlook expecting a gradual recovery), but it is unclear whether the recovery will occur next year or the year after." For now, ultra-low interest rates mean the burden from government bonds is not significant, but in the long term, it is inevitably a burden.
For this reason, there are also expectations that tax burdens will inevitably increase to repay the debt. The IMF suggested last month that countries should consider raising income tax rates, property taxes, or wealth taxes to secure the massive funds required for COVID-19-related expenditures.
Thomas Piketty, professor at Paris School of Economics, introduced in an interview with the British daily The Guardian the day before that raising funds through wealth taxes has already proven effective. He said, "After World War II, Germany and Japan succeeded in economic reconstruction without public debt since the 1950s by imposing taxes on the wealthy."
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