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The Future of Public Debt:
Prospects and Implications
Stephen Cecchetti*
Economic Adviser and Head
Monetary and Economic Department
Bank for International Settlements
First International Research Conference,
Reserve Bank of India
12-13 February 2010
*Views
expressed here are those of the author and do not necessarily reflect those of the BIS.
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The problem
 Public debt is rising sharply in advanced countries
 Debt-to-GDP ratios of 100% is becoming common
 Should we care?
• Post-WWII debts above 100% of GDP were common
(examples: US 120%, UK 300%)
• Japan has been living with high debt for years
• The last industrial countries to default were WWII losers
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Things are not as they seem
 Consolidation is difficult when
• Interest rates are poised to increase
• Growth rates are unlikely to rise
• Even when consolidation occurs, it stabilises debt to GDP
 The long run is much worse
• Populations are aging.
• Unless policy changes debt will rise to 3+ times
its current levels
 Problem needs to be addressed now.
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Outline
 Current facts
 The trajectory
 Challenges for policymakers
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Table 1
Fiscal situation and prospects
1
5
Fiscal balance
Structural balance
General government
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debt
As a percentage of GDP
2007
2010
2011
2007
2010
2011
2007
2010
2011
Austria
Germany
Greece
France
Ireland
Italy
Japan
Netherlands
Portugal
Spain
United Kingdom
United States
–0.7
0.2
–4.0
–2.7
0.2
–1.5
–2.5
0.2
–2.7
1.9
–2.7
–2.8
–5.5
–5.3
–9.8
–8.6
–12.2
–5.4
–8.2
–5.9
–7.6
–8.5
–13.3
–10.7
–5.8
–4.6
–10.0
–8.0
–11.6
–5.1
–9.4
–5.3
–7.8
–7.7
–12.5
–9.4
–1.4
–0.8
–4.5
–3.5
–1.3
–2.2
–3.4
–0.6
–2.8
1.6
–3.4
–3.1
–3.3
–4.0
–6.9
–6.8
–9.0
–2.6
–7.4
–3.6
–6.1
–5.2
–10.5
–9.2
–3.6
–3.7
–6.8
–6.3
–9.0
–2.8
–9.0
–3.1
–6.8
–4.5
–9.9
–8.2
62
65
104
70
28
112
167
52
71
42
47
62
78
82
123
92
81
127
197
77
91
68
83
92
82
85
130
99
93
130
204
82
97
74
94
100
China
India
2
Other Asia
3
Central Europe
4
Latin America
0.9
–4.4
2.1
3.7
–1.5
–2.0
–10.0
–1.2
–4.4
–2.4
–2.9
–8.7
–1.0
–3.9
–2.0
20
81
31
23
41
22
86
37
28
37
23
86
38
29
35
1
Regional averages calculated as weighted averages based on 2005 GDP and PPP exchange rates. 2 Hong Kong SAR,
Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. 3 The Czech Republic, Hungary and
Poland. 4 Argentina, Brazil, Chile and Mexico. 5 Cyclically adjusted balance. 6 For Argentina, the Philippines and
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Thailand, central government debt.
Sources: IMF, World Economic Outlook; OECD, Economic Outlook.
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Graph 1
Government gross public debt and primary fiscal balance in industrial economies
1, 2
As a percentage of GDP
Shaded areas represent forecast.
1
Weighted average based on 2005 GDP and PPP exchange rates of economies cited and data availability. 2 Australia, Austria,
Belgium, Canada, Denmark, France, Finland, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, the United Kingdom and the United States.
Sources: OECD; BIS calculations.
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Graph 2
Projected population structure and age-related spending
Old-age population (ratio to working-age population)
1
Working-age population is between 15-64.
2
1
Estimated increase in age-related government
2
expenditure from 2011 to 2050
As a percentage point of GDP.
Sources: IMF April 2007 WEO; United Nations Secretariat European Commission; Congressional Budget Office.
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Long-term fiscal imbalances
 Age-related spending is exploding
 Focus on short-term is incomplete and misleading
 Concerns about fiscal sustainability & intergeneration equity:
present value of unfunded commitments should be reflected
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Graph 2
Projected population structure and age-related spending
Old-age population (ratio to working-age population)
1
Working-age population is between 15-64.
2
1
Estimated increase in age-related government
2
expenditure from 2011 to 2050
As a percentage point of GDP.
Sources: IMF April 2007 WEO; United Nations Secretariat European Commission; Congressional Budget Office.
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Debt-to-GDP Projections
 30 years and 12 countries
 Baseline:
• Revenue and non-age related expenditure constant at
2011percentage of GDP
• Real interest rate at 1998-2007 average
• Potential growth at OECD post-crisis level
 Gradual adjustment:
Primary deficit improves 1pp of GDP per yr for 5 yrs
 Gradual adjustment
+ freezing age-related spending to GDP at 2011 level
 Results Graph 4
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Graph 5
Projected interest payments as a fraction of GDP
1
In per cent
Source: Author’s projections.
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Table 3
Required average primary balance
to stabilize public debt to GDP ratio at 2007 level1
Austria
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
Portugal
Spain
United Kingdom
United States
1
over 5 years
over 10 years
over 20 years
4.7
7.3
5.5
5.4
11.8
5.1
10.1
6.7
2.2
6.1
10.6
8.1
2.6
4.3
3.5
2.8
5.4
3.4
6.4
3.7
-0.3
2.9
5.8
4.3
1.6
2.8
2.4
1.5
2.2
2.5
4.5
2.3
-1.6
1.3
3.5
2.4
As a percentage of GDP.
Sources: IMF, World Economic Outlook; OECD, Economic Outlook; author’s calculations.
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Risks and risk premia
 Higher debt increases the possibility unstable dynamics
 So, higher debt means a bigger risk premium
 We plot CDS spreads against
•
•
•
•
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Debt to GDP
Government revenue to GDP
Share of short-term debt
Incremental debt to private saving
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Graph 6
1
Sovereign CDS spreads and fiscal indicators
General government debt/GDP
Share of short-term debt
4
3
2
General government revenue/GDP
3
Change in general government debt/savings
5
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Vertical axis: average spread over the last 20 working days; in basis points. 2 Horizontal axis. 3 Forecast for 2011. 4 Domestic
government debt with a remaining maturity of 1-3 years as per cent of total domestic government debt. 5 Average change in general
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Debt and fiscal policy
 Higher taxes create greater distortions
 Higher debt can mean higher real interest rates
 Reduced effectiveness in responding to shocks
 All of this can lower the long-run growth path
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Debt and monetary policy
 Inflation expectations
 Forecast uncertainty
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Conclusions
 Current estimates of public debt ignore the big problem:
age-related expenditure
 High debts have significant real and financial consequence
 Action is needed now.
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