How Worried Should We Be About Government Debt And Deficits?
By Joseph Wu, CFA
While massive aid/stimulus packages from governments in response to the COVID-19 recession have led to exploding budget deficits and debt levels around the world, bond markets, for now, are signalling minimal concerns about debt sustainability. Provided that inflation remains modest and central banks continue to absorb issuance via QE, fiscal deficits and debt seem unlikely to become a problem for the foreseeable future.
Despite ballooning fiscal debt, the U.S. Congressional Budget Office expects net interest payments for the federal government to decline towards 1% of GDP over the span of the next couple of years, reaching the lowest level in six decades (see chart below).
Meanwhile, in Japan, the government now earns more interest than it pays because two-thirds of all Japanese debt bears negative yields (see chart below).
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