This week, the picturesque Swiss town of Davos becomes the epicenter of global policy discussions as world leaders convene to address a plethora of critical issues. High on their agenda are two ongoing major wars, a burgeoning shipping crisis, and the ever-increasing threat of cyber-attacks.
Complicating these discussions, however, is the staggering $88.1 trillion global debt burden, a figure reported by CNN. This unprecedented surge, predominantly fueled by public borrowing during the pandemic, now significantly undermines governments’ capabilities to tackle existing and emerging global crises effectively.
The soaring debt servicing costs not only strain public services, already reeling from successive budget cuts, but also limit efforts to combat climate change and provide adequate care for aging populations.
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The risk looms larger as governments might find themselves unable to borrow more to fulfill existing obligations and fund essential services, says the report.
Former Bank of England’s monetary policy committee member, Michael Saunders, warned that a government unable to finance its debt could face abrupt and painful spending cuts or tax hikes, hampering its response to future shocks, it also said.
As the world faces a risky year of elections with half the global population heading to the polls, there is little incentive for belt-tightening among incumbent administrations. The prospect of new leaders implementing ambitious tax and spending plans raises concerns about the sustainability of already soaring levels of public debt, the report said.
In the United States, record levels of public borrowing have become a major point of contention between Republicans and Democrats, affecting national budget negotiations and jeopardizing the functioning of federal agencies, it said.
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The implications of mounting debt are not limited to economic challenges. Political polarization has already impacted the credit rating of the United States, with agencies like Fitch downgrading its rating. Moody’s has also warned about the potential removal of the country’s last remaining perfect rating.
Amidst these challenges, the increased cost of servicing debt, driven by rising interest rates, is diverting significant funds away from essential public services. In the UK, the Labour Party has scaled back green spending plans due to concerns about adding to the country's debt burden, the report further stated.
As the global economy grapples with these debt challenges and slowing economic growth, some experts, including Raghuram Rajan, former governor of the Reserve Bank of India, suggest that artificial intelligence (AI) could hold the key to a relatively painless recovery.
They hope for discussions at Davos to shed light on potential solutions, emphasizing the transformative power of an AI-driven productivity boom to reshape the world’s economic fortunes.