The Future of Public Debt
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The Future of Public Debt

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The Future of Public Debt Presentation Transcript

  • 1. The Future of Public Debt: Prospects and Implications Stephen Cecchetti * Economic Adviser and Head Monetary and Economic Department Bank for International Settlements First International Research Conference, Reserve Bank of India 12-13 February 2010 * Views expressed here are those of the author and do not necessarily reflect those of the BIS.
  • 2. The problem
    • Public debt is rising sharply in advanced countries
    • Debt-to-GDP ratios of 100% is becoming common
    • Should we care?
      • Post-WWII debts above 100% of GDP were common (examples: US 120%, UK 300%)
      • Japan has been living with high debt for years
      • The last industrial countries to default were WWII losers
  • 3. Things are not as they seem
    • Consolidation is difficult when
      • Interest rates are poised to increase
      • Growth rates are unlikely to rise
      • Even when consolidation occurs, it stabilises debt to GDP
    • The long run is much worse
      • Populations are aging.
      • Unless policy changes debt will rise to 3+ times its current levels
    • Problem needs to be addressed now.
  • 4. Outline
    • Current facts
    • The trajectory
    • Challenges for policymakers
  • 5.  
  • 6.  
  • 7.  
  • 8. Long-term fiscal imbalances
    • Age-related spending is exploding
    • Focus on short-term is incomplete and misleading
    • Concerns about fiscal sustainability & intergeneration equity: present value of unfunded commitments should be reflected
  • 9.  
  • 10. Debt-to-GDP Projections
    • 30 years and 12 countries
    • Baseline:
      • Revenue and non-age related expenditure constant at 2011percentage of GDP
      • Real interest rate at 1998-2007 average
      • Potential growth at OECD post-crisis level
    • Gradual adjustment: Primary deficit improves 1pp of GDP per yr for 5 yrs
    • Gradual adjustment + freezing age-related spending to GDP at 2011 level
    • Results Graph 4
  • 11.  
  • 12.  
  • 13. Risks and risk premia
    • Higher debt increases the possibility unstable dynamics
    • So, higher debt means a bigger risk premium
    • We plot CDS spreads against
      • Debt to GDP
      • Government revenue to GDP
      • Share of short-term debt
      • Incremental debt to private saving
  • 14.  
  • 15. Debt and fiscal policy
    • Higher taxes create greater distortions
    • Higher debt can mean higher real interest rates
    • Reduced effectiveness in responding to shocks
    • All of this can lower the long-run growth path
  • 16. Debt and monetary policy
    • Inflation expectations
    • Forecast uncertainty
  • 17. Conclusions
    • Current estimates of public debt ignore the big problem: age-related expenditure
    • High debts have significant real and financial consequence
    • Action is needed now.
  • 18.