The US public deficit will outgrow real GDP in the next three decades massively, and this is bad news. The deficit currently sits at 5.8% of total GDP and will rise to 10% by 2053, compared to the expected real GDP growth of 1.5% over the same period. Even worse, this is a major problem shared by all the major economies in the world.
Despite massive spending on defense and infrastructure, the Congressional Budget Office indicates that the US spends the most on Medicare and Medicaid, and these outlays will only continue to increase. This is for a country without a strong social security infrastructure. After all, both Medicare and Medicaid only target the elderly and the very poor. Most people have to find ways to cover healthcare expenses. Today, both major healthcare programs take up around 24% of total spending and will rise to close to 30% of the total federal budget. For other economies with strong social security programs, like Europe, the projections might be even worse.
The list of priorities is also increasing
With the relentless improvements in technology, this means modern medicine is increasingly becoming expensive. On the other hand, people are living longer than ever. This means governments will keep spending even more. This is without even the concerning proliferation in conflicts and wars, which will prompt massive spending on defense and military. Furthermore, global crises do happen more often than previously thought. Covid-19 proved it. Climate change is happening.
Protesters in France over retirement age (source: New York Times)
The solution might seem simple. Just increase government revenue. But it’s far from easy actually. Increasing taxes or cutting spending comes with a huge political price. Very few politicians are willing to risk popular support for a good long-term policy. Such has been the catalyst of many financial and economic crises. As a recent example, look at how the pension reform bill to increase the retirement age from 62 to 64 in France led more than 1 million people to the streets to protest. No administration would be willing to suffer hundreds of times the consequences, especially not when they are vying for reelection.
Besides, new priorities are arising every day. For the European Union, for instance, there is an urgent need to be energy-independent after the current war between Russia and Ukraine. This entails massive investments in renewable energy, such as R&D, and subsidies, among others. The Carbon Border tariff and the Critical Raw Materials Act are examples of recent policies pushing in that direction.
But how does this affect developing economies, including those on the African continent?
Well, for starters, the World Bank reports that in 2023, 9 African countries were in debt distress, 15 more were at a high risk of debt distress, and a further 14 were at a moderate risk. Furthermore, according to the IMF, the average debt ratio in sub-Saharan Africa has almost doubled in the last decade and currently is at 60 percent of GDP. African economies are already burdened by debt, mostly foreign debt.
On top of that, the national budgets of most African countries comprise a huge portion of external finances. For a developing economy, it is always plausible for revenues to increase at a faster rate due to economic growth. However, one thing is certain. The public debt crisis in developed economies is going to massively affect the “external grants/loans” portion of the national budgets.
To what extent might African economies be affected? Will the global private sector increase its presence in developing economies as developed countries become more indebted? How about the growing discourses of challenging the dollar’s hegemony as a global reserve currency?
Part II coming soon.
Leave a Reply