Paper: GS – III, Subject: Economy, Topic: Fiscal policy and budgeting, Issue: Concerns over rising levels of debt.
Context:
The OECD’s Global Debt Report 2025 highlights alarming levels of debt in both developed and emerging economies. It warns of rising sovereign debt, shrinking policy space, and increased financial vulnerabilities.
Key Highlights:
Sovereign Debt Surge:
- OECD countries’ debt rose from $5 trillion (2007) to $15.7 trillion (2023) and is projected to reach $17 trillion in 2025.
- Emerging markets increased borrowing from $1 trillion (2007) to $3 trillion (2024).
Corporate and Government Borrowing Spike:
- Debt growth is mainly driven by Quantitative easing post-2008 Global Financial Crisis and low interest rates encouraging excessive borrowing by governments and corporations.
Systemic Concerns:
Vulnerability to Market Volatility: Foreign investors can exit faster during instability leading to market fluctuations. It can lead to rise in bond yields as seen in UK after fiscal uncertainty (e.g. Labour Party welfare reform confusion).
Political Constraints:
- Rising debt makes it harder to implement fiscally prudent policies. It may lead to backlash and rise of populist parties.
- For example, In U.K., Labour backtracked on welfare reform amid bond market turmoil and political heat.
Corporate Risk-Taking:
- IMF warns of low interest rates fuelling risky corporate behaviour which leads to Buybacks, shareholder payouts, and debt-fuelled growth.
Shift in Pension Funding: Pension funds may invest less in sovereign bonds, increasing reliance on foreign investors who holds over 1/3 of Western government bonds.
Broader Implications:
Impact on Social Welfare:
- Ageing populations in developed nations pressure health and pension budgets. Governments may also face tough choices on public spending.
- Monetary Policy Limitations: As seen in the case of Japan, the Bank of Japan (BoJ) continued quantitative easing which led to:
- Domestic banks now becoming reluctant to hold government bonds.
- Rising uncertainty in ‘carry trade’ investments.
Conclusion:
OECD flags global risks of rising debt, especially in developed economies. Without fiscal prudence, many countries face the threat of financial instability. For emerging economies, access to debt markets may become volatile amid global shocks. There is a need for realistic, disciplined economic policies to navigate stormy global debt conditions.
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