Major economies globally are projected to see post-economic recovery in 2021 due to the effective rollout of COVID-19 vaccinations, along with prudent policy measures implemented by various governments. However, a plethora of fiscal measures is leading to debt explosion in advanced economies such as Canada, France and the UK, with gross government debt exceeding 100% of GDP in 2020 and 2021, says GlobalData, a leading data and analytics company.

Shruti Upadhyay, Economic Analyst at GlobalData, comments: “Japan and Italy’s consistent measures in dealing with second and third waves of COVID-19 saw these countries have the highest stimulus, announced as a percentage of GDP, at 57.8% and 60.9%, respectively. Stimulus measures in other major nations such as Germany and France accounted for 37.06% and 26.68% of GDP as of May 2021. The pandemic reduced the potential for economic growth as government funds were diverted away from productive investment.”

With collapsing government revenue, nations have noted a substantial rise in budget deficit. Several nations witnessed increased government borrowing such as the UK, which saw borrowing increase from 2.3% of GDP in 2019 to 13.4% of GDP in 2020 and is expected to reach 11.8% of GDP in 2021. Correspondingly, to keep its economy afloat, the French Government’s borrowing rose from 3% of GDP in 2019 to 9.9% of GDP in 2020 and is projected to reach 7.2% of GDP in 2021. Italy’s government borrowing rose to 9.5% of GDP in 2020, however, it is projected to decline to 8.8% in 2021 due to the easing of restrictions by Q3 2021. Increased government borrowing has pushed economies into a higher debt that could become harder to tackle in the short-term.

Upadhyay continues: “Governments and central banks in major economies such as Japan, Italy, Germany, the US and the UK have sanctioned aggressive monetary and fiscal stimulus measures to combat the loss of economic activity caused by the pandemic. Unplanned expenditure in the form of stimulus packages put pressure on government finances in 2020 and 2021, leading to unbalanced fiscal sustainability in the long term.”

Government borrowing in the US was already rising before the cataclysmic impact of the pandemic. With humungous stimulus amounting to 37.3% of GDP, the country’s borrowing reached 15.8% of GDP in 2020 – and this is forecasted to reach 15% of GDP in 2021. This led to government debt rising to 127.1% of GDP in 2020, and this is projected to rise further to 132.8% in 2021 – outpacing the World War II record of 106% of GDP in 1946. Furthermore, Canada’s general government debt-to-GDP ratio increased to 116.3% of GDP in 2021 as government borrowing inflated with the Canada Emergency Response Benefit (CERB), which provided struggling Canadians with monthly support. Ballooning fiscal deficits have led to a substantial increase in general government debts in major nations, which can be sustained in the short term, but only if the interest rate remains low for a longer period.

Upadhyay adds: “High and rising public debt increases the likelihood of a fiscal crisis at a global level. As soon as the economy substantially recovers, government and policymakers should focus on swiftly developing a long-term fiscal consolidation path, as this will enable nations to ensure a robust economic position and provide them with the flexibility to address future public health emergencies.”