Dealing With Debt

High debt crowds out a country’s ability to invest in people’s futures.

Analyze This! Debt Transparency

Behind The Scenes

Got fiscal space?

Fiscal space is the amount of room countries have for temporarily increasing their budget deficits without jeopardizing their access to markets or the sustainability of their debt. It is a dynamic notion that can change with market and economic conditions. For this reason, the IMF’s framework to assess fiscal space relies on several factors, such as the composition and trajectory of public debt, financing needs and ease of borrowing, and the strength of fiscal institutions. ‍ Some countries have substantial fiscal space. Among other things, this reflects their access to stable and cheap funding from financial markets, healthy public finances, and strong institutions. In other countries however, fiscal space is severely constrained. This reflects higher risks related to funding from financial markets and relatively high levels of debt, financing, or debt servicing needs. ‍ Having fiscal space is like having money in the bank; whether that space should be used is a totally different question. It is a government’s responsibility to build adequate fiscal space and use it judiciously, without impairing the long-term economic health of the country.

Global debt—both public and private—is at an all-time high. It stood at $184 trillion at the end of 2017, which is equivalent to 225 percent of global GDP. At moderate levels, debt in itself is not bad if it is used efficiently in growth-enhancing activities. Still, and while it does not necessarily signal a crisis, high debt often diverts resources from more productive spending. For governments, interest payments on debt crowd out spending on education, health, and infrastructure, which are all investments in more sustainable and equitable growth. For firms, high debt means fewer resources to invest in expanding businesses and jobs.

High public debt also limits the ability of policymakers to increase spending or cut taxes to offset weak economic growth, especially if this risks an unfavorable reaction from financial markets or undermines the longer-term health of public finances. In other words, it reduces a country’s fiscal space. In May 2018, the Executive Board discussed the experience with the IMF’s new framework for measuring fiscal space. A key principle of this framework is that fiscal space is not determined just by a country’s level of public debt, nor is it a static concept. It can vary with market and economic conditions, sometimes quite quickly and substantially. Hence the framework recognizes that the decision to use fiscal space, or not, will depend on country-specific circumstances.

The April 2019 Fiscal Monitor also shines a light on the importance of fiscal policy in dealing with high public debt while investing in people’s futures. To make room in the budget for the next downturn, countries with high debt should increase revenues or curb excessive spending. Fiscal policy must also prepare for the shift in demographics and new technologies, which are affecting growth and income distribution. This means reorienting spending toward growth-enhancing investment in infrastructure, health, and lifelong education and cutting wasteful spending, such as inefficient energy subsidies. More progressive taxation can help reduce inequality, and reforming taxation of large multinational corporations—especially digital firms—can limit profit shifting, which deprives low-income countries of much needed revenue.

IMF efforts to help countries address high and rising debt vulnerability have proceeded apace. The Group of Twenty put forward a paper to enhance debt transparency and sustainable lending practices by creditor countries. To strengthen debt sustainability analysis, a new low-income-country debt sustainability framework was introduced in July 2018. It recommends much broader coverage and reporting of public debt. The Executive Board has also been engaged in similar discussions to update the Debt Sustainability Framework for Market Access Countries.

Still, high debt need not always be a cause for alarm. It turns out that what a government owes matters as much as what it owns. The October 2018 Fiscal Monitor showed that stronger balance sheets—a statement of assets and liabilities at a given point in time—are an important buffer during downturns. The wrinkle is that few governments know how much they own, or how they use those assets for the public’s well-being. Better utilizing a government’s assets matters and can mean about 3 percent of GDP more in revenue each year and lowered risk.

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What is the wealth of nations?

Just like individuals, governments sometimes lose track of their finances. While they keep close tabs on debt, they are less clear on the assets they own. IMF research has analyzed public net worth for 31 countries.

For these countries, total liabilities were much larger than debt alone and stood at about 198 percent of GDP. Government public debt accounted for less than half of those liabilities, with pension obligations a large part of the remainder, even though few countries record them as such. Total assets, on the other hand, amounted to $101 trillion, or 219 percent of GDP. These include money governments have in the bank and their financial investments—things like roads, bridges, and sewer pipes, as well as natural resource reserves in the ground.

What does it all mean? Take the example of China. Total debt stood at 247 percent of GDP in 2016. Yet China has substantial government assets, reflecting years of high infrastructure investment. These assets are larger than its liabilities, putting net worth—the difference between assets and liabilities—well above 100 percent of GDP, the highest among emerging market economies. While debt-related risks in China are large, there are also buffers.

Figure 1.3

What Governments Own and Owe