NCPA - National Center for Policy Analysis

Western Debt Load is Approaching the Red Zone

January 20, 2004

On paper, the developed nations of the world have a manageable level of debt, relative to gross domestic product (GDP). In reality, the debt load is approaching dangerous levels, according to the Economist magazine. This is because governments have long-term budgetary responsibilities that are not included in their spending schemes.

As the western world ages, society will require more resources be spent on retirement pensions and health care. If these liabilities are included into debt loads, they explode to wartime levels.

Moreover, there are also additional risks in the future. For example:

  • Advances in medical technology will push up public spending on health care because the more medical science and public health services can provide, the more people want.
  • Climate change may increase the incidence of floods, storms and droughts -- causing the government to step in as insurers of last resort.
  • Additionally, globalization may limit governments' ability to exploit their national tax bases as both capital and labor can increasingly move away from high tax zones.

Credit-rating agencies are already reacting. Standard & Poor's gave warning last year that many European governments will be relegated to the second division of borrowers if they do not tackle spending commitments that are set to soar as populations age.

Politicians will either have to cut back on overly generous benefits or raise taxes to exorbitant levels, say observers.

Source: "In the long run we are all broke - Stopping governments going bust," The Economist, November 22, 2003; based upon: Peter Heller, "Who Will Pay? Coping with Ageing Societies, Climate Changes, and Other Long-Term Fiscal Challenges," International Monetary Fund, November 2003.

 

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