The great balancing act: Managing the coming $30 trillion deficit while restoring economic growth
As they continue to grapple with a global pandemic, governments will need to manage deficits and debt-payment plans while finding the best ways to support economic recovery.
The dual imperative of our time is to save lives and safeguard livelihoods—and governments around the world are pulling out all the stops to do so. The resulting ramp-up of relief and stimulus spending to unprecedented levels has occurred just as tax revenues have slumped. As a result, government deficits worldwide could reach $9 trillion to $11 trillion in 2020, and a cumulative total of as much as $30 trillion by 2023.
Governments will need to find ways to manage these unprecedented deficits without crippling their economies. It is this challenge which creates the need for the great balancing act: managing the $30 trillion deficit while restoring economic growth. We believe that this can be done—but it will require governments and the private sector to work together like never before to lay the foundations for a new social contract and to begin shaping a postcrisis era of shared, sustainable prosperity.
There is already concern that many countries will struggle to meet their commitments to creditors, sparking a debt crisis that would compound the economic crisis unleashed by COVID-19.1 Yet even if governments do avoid defaults, record public-sector debt levels could seriously dampen economic recovery if not managed effectively. Increased debt-servicing costs could crowd out vital investments in areas such as infrastructure and reskilling. Decisions to “print money” at scale could prompt a rise in inflation. And a big rise in taxation could hamper business innovation and growth and harm countries’ competitiveness.
Any of these paths could lead to a vicious cycle in which both economic growth and public revenues are suppressed for years to come. But governments have more power than is commonly assumed to manage larger deficits and to ensure that they sustain sound public finances and economic competitiveness for their countries—and so foster a virtuous cycle instead. For example, there are opportunities to improve the effectiveness of tax collection, including the use of accelerated digitization. And careful spending reviews can reallocate budgets to the highest priorities while delivering savings through better procurement and fraud reduction.
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Πηγή: mckinsey
