Developed nations face a rising tide of government debt that poses “a significant challenge” to budgets as interest rates increase around the world, the OECD has warned.
Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the “relatively favourable” sovereign funding environment “may not be a permanent feature of financial markets”.
Fatos Koc, senior policy analyst at the OECD, cautioned that most members of the organisation - sometimes dubbed the rich nations’ club - confront an “increasing refinancing burden from maturing debt, combined with continued budget deficits”.
The warning on the longer-term consequences of high public borrowing marks a shift in stance by the OECD, which as recently as November was praising countries for easing fiscal policy to help global growth.
In an Economic Outlook, published at that time, the Paris-based organisation said that “even a lasting increase in 10-year government bond yields of 1 percentage point?.?.?.?might worsen budget balances on average by only between 0.1 per cent and 0.3 per cent of GDP annually in the following three years”.
But Ms Koc now argues that the wisdom of using fiscal measures as economic stimulus depends on an individual country’s budget position, and that it is “important to create strong fiscal roots in an economy while times are good”.
The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year. Debt to GDP ratios across the OECD averaged 73 per cent last year, and its members are set to borrow 10.5tn pounds from the markets this year.
Because much of the debt raised in the aftermath of the financial crisis is set to mature in the coming years, developed nations will have to refinance 40 per cent of their total debt stock in the next three years, the OECD said.