THE WORLD’S DEBT IS 286 PERCENT OF ITS GDP, according to The Economist. GDP stands for gross domestic product, which is the value of all goods and services produced in a country or region.
So, the world owes almost three times the value of what it produces. For the most part, governments have incurred the debt as they’ve tried to help their countries recover from the financial crisis and subsequent recession. A 2015 McKinsey and Company report explained it like this:
“Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. That poses new risks to financial stability and may undermine global economic growth.”
McKinsey’s findings show some types of debt grew more slowly from 2007-2014 as compared to 2000-2007. Increases in household debt and financial debt growth rates (8.5 percent to 2.8 percent and 9.4 percent to 2.9 percent, respectively) slowed sharply.
Other types of debt grew faster. Corporate debt grew at a slightly faster pace during the period (5.7 percent to 5.9 percent), while government debt grew rapidly (5.8 percent to 9.3 percent). Higher government spending was welcomed in the depths of the recession when it served as a counter-balance to low spending in the private sector.
Now, however, government debt levels are becoming a concern. McKinsey reported government debt has risen to such high levels in six countries – Spain, Japan, Portugal, France, Italy, and the United Kingdom – that unusual measures may be needed to reduce debt.
The most obvious way to decrease debt is to trim annual spending – also known as reducing the fiscal deficit – but that could be counterproductive since it often inhibits economic growth, and encouraging growth was the point of taking on debt in the first place. McKinsey recommends alternatives such as “extensive asset sales, one-time taxes on wealth, and more efficient debt-restructuring.”