[CliffFletcher]

Given the increasing demands put on public finances as the population ages and health care spending climbs further, I’m not optimistic we’ll avoid a debt crisis in the coming decades.

How will politicians avoid enormous public debts?

The world’s public finances look increasingly precarious. In the year to July America’s federal government borrowed $2.3trn, or 8.6% of gdp—the sort of deficit usually seen during economic catastrophes. By 2025 five of the g7 group of big rich countries will have a net-debt-to-gdp ratio of more than 100%, according to forecasts by the imf. Such debts may have been sustainable in the low-interest-rate era of the 2010s. But those days are long gone. This month the ten-year Treasury yield briefly hit 4.3%, its highest since before the global financial crisis of 2007-09.

How will governments shed these burdens? Economists are increasingly gripped by the question. A recent paper by Serkan Arslanalp of the imf and Barry Eichengreen of the University of California, Berkeley, presented at America’s annual monetary-policy jamboree in Jackson Hole, Wyoming, on August 26th, sets out a menu of options. It is not exactly an appetising one.

Big economies have had big debts before. Broadly speaking, they have dealt with them by employing one of two strategies. Call them the austere and the arithmetic. The austere method is to run primary surpluses (ie, surpluses before debt-interest payments). In the 1820s, after the Napoleonic wars, Britain’s debts reached almost 200% of gdp; the Franco-Prussian war left France owing nearly 100% of gdp in the 1870s. Previously Mr Eichengreen and co-authors found that between 1822 and 1913 Britain ran primary surpluses sufficient to reduce the debt-to-gdp ratio by more than 180 percentage points; France did enough to reduce its ratio by 100 percentage points in just 17 years after 1896.

Messrs Arslanalp and Eichengreen are pessimistic about the prospect of democracies repeating the trick today. In the 19th century welfare states were minimal. British politicians followed the Victorian philosophy of “sound finance”; the French sought to reduce debts so as to be ready for their next war. In contrast, modern welfare states are weighed down by ageing populations, and the need for more defence spending and green investment means the size of the state is growing. Politicians could raise taxes. But other research by the imf finds that in advanced economies, from 1979 to 2021, fiscal consolidations were less likely to succeed in cutting debts if they were driven by tax increases instead of spending cuts, perhaps because raising taxes harms economic growth.

… What, then, will happen? “Governments are going to have to live with high inherited debts,” reckon Messrs Arslanalp and Eichengreen. The best politicians can do is not to make a bad situation worse. Yet the ongoing accumulation of debt suggests it is unlikely that politicians will follow this advice. On its current path America will match its post-war record of spending 3.2% of gdp on interest in 2030. Two decades later this will pass 6%. The bill could be higher if another pandemic or major war arrives in the meantime.

However unlikely it seems that voters and politicians will be willing to tolerate primary surpluses, sustained inflation or financial repression, they will probably reach a point where they are equally unwilling to put up with handing over a large chunk of tax revenues to bondholders. At such a time political constraints will ease—and the danger of a bond-market crisis will rise. The debt-reduction menu will then not look quite so unpalatable.

https://www.economist.com/finance-an...s-public-debts