Closing the $30 trillion gap: Acting now to manage fiscal deficits during and beyond the COVID-19 crisis

Countries can not only take immediate steps to create a credible debt story for funding the deficit but also consider a portfolio of interventions to ensure their longer-term financial sustainability.

 
In response to the COVID-19 crisis, governments around the world have ramped up their relief and stimulus spending to unprecedented levels—just as tax revenues have slumped. The result could be a worldwide $10 trillion deficit in 2020 and a cumulative shortfall of up to $30 trillion by 2023.¹ As deficits mount, governments must consider a wide range of options. Some are, in effect, monetizing their debt through central banks. Others lean on additional borrowing or are considering ways to reduce deficits or sell off assets.

Whichever path governments choose, they face a great balancing act: managing record fiscal-deficit levels while restoring economic growth.² We estimate that they will seek to raise debt equivalent to an additional 20 to 25 percent of global GDP over today’s level, as a direct result of the crisis. To start with, governments must make sure they can not only raise enough credit from debt capital markets (DCMs) and multilateral institutions but also optimize the cost-to-risk ratio of their debt portfolios. Yet for most countries, the greater challenge will be to ensure that increased debt-servicing costs do not crowd out vital investments or trigger big tax increases that would damage competitiveness and reduce aggregate demand at a time of crisis.

All this will not be easy. Our analysis suggests that higher levels of sovereign debt will add as much as $2.5 trillion a year to the debt-servicing³ costs of governments over the next decade. They will need bold strategies that consider every available lever to master the great balancing act—and to avoid the worst-case scenario: a debt crisis compounding the economic one that COVID-19 has already unleashed. The timing of these strategies will be one of the most complex and instrumental success factors. To avoid disrupting the economic revival, fiscal measures should not come too early, but to avoid losing control of the fiscal trajectory, they should not come too late.

Governments can scale up their capabilities to optimize existing revenue streams and contain expenditures, focusing in each case on operational excellence while taking care not to hamper the economic recovery. In some countries, an even greater opportunity lies in making government balance sheets transparent, including assets such as land, property, and state-owned enterprises (SOEs).

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Πηγή: mckinsey