The total debt of governments worldwide reached an unprecedented $91 trillion, nearly matching the size of the global economy. This massive debt burden poses a significant threat to the living standards of people, even in wealthy nations like the United States.

The pandemic partly contributed to the surge in debt, creating increasing risks for economies. Despite an election year globally, politicians largely ignored the issue, avoiding discussions on tax increases and spending cuts necessary to address the borrowing surge.

Some politicians made extravagant promises, risking inflation spikes or potentially triggering another global financial crisis. Last week, the IMF reiterated its warning that the "chronic fiscal deficit" in the United States needed urgent attention, echoing investor concerns about the government's long-term financial path.

Roger Hallam, head of interest rate management at Vanguard, noted that persistent deficits and rising debt burdens have become a medium-term concern. Investor anxiety grew alongside global debt burdens, causing economic disruptions worldwide.

In France, political turmoil exacerbated concerns about the country’s debt, leading investors to demand higher bond yields. The first round of French elections showed that some market fears might not materialize soon, as stock markets and the euro rose the following day.

Higher debt servicing costs meant fewer funds for essential public services or crises like financial collapses, pandemics, or wars, potentially causing further global unrest and protests.

Higher government bond yields also impacted other debt pricing, increasing borrowing costs for households and businesses, harming economic growth. As interest rates rose, private investment declined, and governments found it harder to borrow to counter economic downturns.

Karen Dynan, former chief economist at the US Treasury and current professor at Harvard Kennedy School, said addressing US debt issues would require either tax hikes or cuts in essential services like Social Security and Medicare. Politicians avoided discussing the tough choices needed, fearing severe consequences for people’s lives.

Kenneth Rogoff, an economics professor at Harvard, noted that countries, including the US, would face painful adjustments, emphasizing that debt was no longer free. Misguided beliefs that interest rates would remain near zero indefinitely led to current challenges as global interest rates surged.

In the US, the federal government would spend $892 billion this fiscal year on interest payments, exceeding the defense budget and nearly matching the Medicare budget. Next year, interest payments would surpass $1 trillion on the national debt exceeding $30 trillion, nearly matching the US economy's size. The Congressional Budget Office projected that US debt would reach 122% of GDP in just ten years and 166% by 2054, slowing economic growth.

Despite growing concerns about federal debt, neither Joe Biden nor Donald Trump, the main presidential candidates for 2024, promised fiscal discipline. During the first presidential debate hosted by CNN last week, each blamed the other for worsening US debt through either Trump’s tax cuts or Biden’s additional spending.

British politicians similarly ignored fiscal concerns ahead of the upcoming general election. The influential Institute for Fiscal Studies condemned both major parties for a "conspiracy of silence" about the dire state of public finances.

Countries attempting to address debt issues faced significant challenges. In Germany, internal conflict over debt limits put the ruling coalition under immense pressure, potentially culminating in a political standoff this July.

In Kenya, efforts to tackle the country’s $80 billion debt sparked nationwide protests, leading to 39 deaths. President William Ruto announced last week he would not sign tax hike proposals into law.

Delaying debt reduction efforts left governments vulnerable to severe market consequences. The UK’s recent example saw Prime Minister Liz Truss cause a pound crash in 2022 with large tax cuts funded by borrowing.

France faced serious financial crisis risks overnight after President Emmanuel Macron called for early elections last month. Investors feared populist lawmakers inclined to spend more and cut taxes, increasing the country's debt and budget deficit.

While worst-case scenarios seemed less likely now, the outcome after Sunday’s second round of voting remained uncertain. French government bond yields continued to rise, hitting an 8-month high on Tuesday.

Karen Dynan highlighted how political dysfunction could quickly unsettle financial markets, making investors doubt a government’s debt repayment willingness. She stressed the lack of imagination regarding potential negative outcomes and the unpreparedness for a major market panic over US debt.

Source: CNN Arabic.