Pandemic and climate change mean extraordinary debt levels are becoming the new normal

November 19, 2021 GMT

Extraordinary times and extraordinary challenges perhaps inevitably allow the normal challenges that we wrestle with in normal times to escape attention.

So the parallel imperatives of curbing the global Covid-19 death toll, funding unprecedented investment in health systems, as well as vaccine research and distribution, have created extraordinary challenges.

Combined with the need to aid economic recovery from the pandemic recession and begin meaningful funding for the green adjustments needed to rein in global warming, these have created a unique set of alibis for what in normal times would be seen as rampant fiscal profligacy.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.


As debt has soared to unprecedented levels worldwide, governments have justified emergency spending that in normal times would have cost them elections. Recall UK finance minister Rishi Sunak delivering back in March a “spend now, tax later” budget tailored to these extraordinary times.

“The amount we’ve borrowed is only comparable with the amount we borrowed during the two world wars,” he said. “It is going to be the work of many governments, over many decades, to pay it back.”

So far, almost two years into the pandemic, the ends have justified the fiscal means. The International Institute for Finance’s (IIF) Global Debt Monitor estimates that more than US$24 trillion has been added to global debt since the start of 2020 through tackling the pandemic, facilitating recovery and supporting companies and employees.

Global debt now stands at around US$296 trillion, amounting to around 353 per cent of global GDP. This compares with 226 per cent in 2019 and what now seems a modest 193 per cent of global GDP in 2007 before the global financial crisis in 2008.

The World Bank says more than 100 million people have been thrown back into extreme poverty since the start of the pandemic. One can only guess what that number would be without emergency debt-funded measures from governments across the world.


The International Monetary Fund estimates that at least seven countries are now in debt distress while almost 30 face a high risk of debt distress. Many are now forced to spend a third to half of government revenue on debt service.

Unlike those economies with sufficient reserves or ready access to debt markets, this growing list of debt-distressed countries faces the toughest of choices ” no funds for vaccines, no capacity to strengthen fragile health care systems and no support for people forced out of work by the pandemic. Let’s not even talk about the funds needed to mitigate the harm being inflicted by climate change.

Up to now, the extraordinary surge in global debt levels has mainly been reported as a crisis for developing countries. Rich countries have been chided for not doing enough to help, rather than being a source of concern in their own right, but that might be about to change.

After the latest IIF update on global debt, Financial Times columnist Gillian Tett was blunt about the “inexorable rise” in borrowing levels. She said: “The only thing more remarkable than the size of this longer-term surge is that there is so little public debate about its consequences ... The fact that our global system is three-times leveraged, and rising, deserves far more debate.”

Several recent shifts seem set to change the mood. The first is rising anxiety over inflation. Putting aside the issue of whether the current inflationary surges are a temporary consequence of recovery from the pandemic, inflation fears have provided a warning that the 13-year period of near-zero interest rates could soon be at an end.

Debt levels have worried few while low interest rates have kept the cost of debt service manageable. But add one or two percentage points to those interest rates and the implications for many leading economies begin to look seriously ugly.

A second concern is that the pace and strength of economic recovery from the pandemic might be weaker than assumed, in particular if new Covid-19 variants keep hospitals full and lockdowns and other social distancing measures in place. Without strong growth, the task of economic repair will be more challenging, undermining our ability to reduce debts to sustainable levels.

A third factor, clear in the wake of the UN climate summit, is that if the pandemic has cost the global economy multiple trillions of dollars, trillions more will be needed to tackle climate change. Unlike pandemic-related costs, which hopefully will be behind us soon, the cost of shifting our global economy to reach net zero emissions by 2050 is a decades-long marathon.

Recognising this huge spending need, what government can honestly claim the capacity to reduce debts from their present stratospheric levels?

A fourth concern, clear in the debates over US President Joe Biden ’s “Build Back Better” initiative, is the need for higher taxes to make such ambitious new spending initiatives possible. Appetite is low for new taxes anywhere, even if they are needed to get debt levels under control.

Facing these unpalatable realities, three equally unpalatable responses seem likely. First, many of the world’s poorer countries will need debt forgiveness on a large scale, not just the debt-service holiday being offered by the World Bank.

Second, there is a real danger that governments will allow inflation to bring debts down from the stratosphere. Finally, governments might leave debts to soar while leaving interest rates around zero to keep debt-service costs manageable.

Both of these options will be ruinous to millions but could be the least-bad option to many governments. Sadly, extraordinary times are about to become normal, and that goes for strangling debts, too.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.