Austerity is the result of countries’ democratic decisions to wait until the last minute before acting, under the pressure of the markets, mainly by raising taxes rather than implementing long-waited reforms. Lorenzo Bini Smaghi, former member of the executive board of the European Central Bank.[1]
Federal government debt has nearly doubled since President Barack Obama took office. Recent progress toward reducing the annual budget deficit is welcome, yet federal debt is still projected to increase 50 percent over the next decade and then rise rapidly thereafter under existing policies.[1] As federal debt has soared, so have concerns about America’s future. Used properly, debt can safely finance private and government investment in productive capital to support economic growth.
The Dynamic Relationship Between Global Debt And Output
The global economy has reached record levels of indebtedness, to the concern of researchers and policymakers. On the one hand, debt can be beneficial by smoothing out consumption and accelerating capital accumulation, and thus contributing to economic output. On the other hand, rising debt increases debt service costs and can potentially expose countries to financial risks and lower output. In particular, a large expansion of debt can be associated with a significant economic contraction that can last for years.
Global debt as a share of gross domestic product (GDP) has been on an upward trend for decades (see figure 1). Rising debt levels are occurring across developed and developing countries in both the public and private sectors. Despite the overall global trends, patterns of debt vary by sector and a country’s level of economic development.[1] For example, in the private sector - comprising firms and households - develo