TIOL - COB( WEB) - 918
MAY 2, 2024

By Shailendra Kumar, Founder Editor

THE global economy was sailing close to the wind prior to 2020! Then the ill-wind came and the life on this planet got scattered to the four winds! It all began with the pandemic, which did not only cost the world millions of body bags but also nudged most governments to play with the fire of fiscal profligacy! To deal with the crisis and to support the vulnerable quarters of population, most governments in the rich world and also, notably large number of emerging economies, felt compelled to move away from fiscal conservatism and cuddle fiscal brinkmanship - an extravagant spending spree of sorts! Beyond the pale of doubt, it was de rigueur by the prevailing glum and grim situation to save precious lives. However, fiscal policy cocktail along with the monetary policy and the soaring public debt appear to have gotten out of control after a year of impressive fiscal restraint in 2021-22! Many geo-economic and geopolitical events have elbowed a good number of economies to take a ride into fiscal fantasyland and, that have worsened the fiscal consolidation efforts across the world. Pssst! And the global scourge, I strongly feel, is going to bed with us for the next one decade, at least!

What adds to the already precarious trend of slack fiscal policies and ultra-lax spending propensities is the record number of general elections in the current year. As per data, as many as 88 economies and economic areas are either scheduled to or have gone through polls in 2024. The IMF study suggests that most governments tend to loosen their grips over fiscal faucets in the election year in response to popular political discourse in favour of fiscal expansionism. Such a trend is found to be more pronounced in 2024. Such poll-induced fiscal poltroonery tends to cost 0.4% fiscal slippage or addition to the prevailing fiscal deficit, observes the IMF Study. In the elections years, spending pressures pile up on political parties in power to retain helmsmanship of the governments. Empirical evidence, in the case of India, reveals such a bias if one analyses the budget allocations announced in the Interim Budget 2024. Voters need to be cajoled and fiscal spigots are pretty good to do that!

Economists including the multilateral agencies like IMF, are worried that strong spending pressures on national budgets, including from pensions, wages, climate change, defence, new industrial policies, welfare subsidies and political resistance to taxation a la delayed global minimum tax, are likely to militate against fiscal sustainability and financial stability. What rubs salt to the wound are higher interest rates and subdued medium-term growth prospects which would worsen the debt quagmire the global economy has skidded into! IMF latest report underlines that four years after the COVID-19 pandemic, fiscal deficits and debt are much higher than pre-pandemic projections. Higher interest rates designed to deal with the demon of inflation have inflated interest bills to stratospheric-level - USD 13 trillion per annum - and is rising! This is if all debts of governments, corporate sector and households are taken into account. For governments alone, there is a jump of 10% in 2023 as compared to 2021 and it is more than USD two trillion annually! Besides gargantuan spending on social benefits, subsidies and direct transfers to support people impacted by the pandemic, energy price shocks have further debilitated the fiscal health of exchequers across the world. Worse, a large number of governments have further cut taxes and reduced social security contributions in order to boost sluggish demand to undergird the declining growth curve.

The global debt landscape has undergone a tectonic shift since the pandemic year. As per the IMF database, it was USD 226 trillion in 2020. In the following year, it registered the sharpest-ever jump since the WW-II and raced past the threshold of USD 300 trillion. Such galloping rise in debt was historically seen in 1820s - after the Napoleonic wars, Britain's debt had peaked to almost 200% of GDP. By the end of 2023, the global debt skyrocketed to USD 313 trillion. Though it was predominantly driven by the rich economies like the US, the UK, France and Japan - owing to their huge spendings to support the pandemic-devastated population but it has pushed the global debt-to-GDP ratio to a new scary peak. In the OECD areas alone, the government bond debt is projected to swell to USD 54 trillion in 2024 - a sharp jump of USD 30 trillion as compared to 2008. What has exacerbated the balefully ultra-generous spending trend of the rich world is the inflation, originating from the pandemic-disrupted global supply chain. The spill-over effect of over-indulgence of the rich world is that to meet their debt obligations - the interest bill, over 100 Global South countries will have to scythe their unavoidable spendings on education, health and social protection! Plus ça change! A case of a frog in the 'boiling water'!

The latest IMF report underlines that the global public debt would be inching close to 99% by 2029. And the two key drivers are going to be the US and China where public debt is projected to feverishly rise beyond their historical peaks. What are definitely going to trigger a spurt in the spending pressure are the green transitions and the rapidly-ageing population which means more pensions and health expenditure. What makes the future look pub-ugly are the tepid growth prospects and the prevailing high interest rates which would further tighten the fiscal space in most economies! What promises scary goosebumps is the vertical rise in the defence kitties of most countries. The Ukraine and Gaza wars have indeed turned it pale and vinegary for the global economy. No amount of guts and guile promises early resolution to these sticky crises! The IMF observes that while the pace of fiscal consolidation is required to be calibrated to realise a balance between fiscal risks and the steam of private demand, forthright actions are needed where sovereign risks are elevated. To deal with the growing debt stress, the IMF and the World Bank are trying to hammer out some affordable schemes, including debt-forgiveness gestures, but what painfully complicates such Western efforts is the Chinese stubbornness to stall them. Cosying up to Beijing is not yielding even a tad! Riding the horse-cart of its BRI scheme, China has become the largest lender to the world's poor economies. And what it often does, is to gobble up two-thirds of their external debt-service payments! Ouch! It has turned into a battle of hard currency might vs what is right?

How is India doing on this front? India has indeed managed its fiscal purse well notwithstanding the pandemic-related compulsive spendings and other election-tethered freebies. Although India has also embraced a New Industrial Policy - Production Linked Incentive, with hefty capital and tax subsidies but it is not as loose as the ones being implemented by the US. Biden has gone for an overdose of subsidy pills, debts and new taxes not being supported by the Congress. With China turning into a boogeyman, Mr Biden had perhaps no choice but to do everything to retain the American hegemony crown. India is also in the race for the regional military power status, partly driven by the Dragon, but it has not lost sight of its fiscal fault lines. It intends to scissor fiscal deficit to 5.1% in the current fiscal. The domestic consumption bowl has sustained India's high growth trajectory which means pretty decent spurt in its revenue collections - both the GST and the direct taxes. Secondly, India's external debt is not that back-breaking - only USD 635 billion. Its domestic debt is about 85% of the GDP which needs to be pruned gradually. For the world to embrace fiscal consolidations, the two future measures to be taken by all are - first, to slash public debts, and second, not to uptick tax rates as raising taxes necessarily punctures economic growth! The crux for the global economy is that it will have to go through many spirals of aches and pains in the coming years! Yup, tricky terrains lie ahead! Voila!