Fiscal and monetary authorities are likely to be remembered for a long time for their extraordinary interventions against the Covid-19 pandemic. However, it is unclear whether future generations will see them as heroes or villains.
The short-term results of the bazookas deployed by central bankers and economic stimulus implemented by governments are incredible. The global economy is recovering swiftly, and employment levels are improving.
However, all this came at a cost of higher deficits and debt. A major concern with this is that the current high debt levels crowd out private investment. Interest payments would rise, thus requiring larger changes in tax and spending policies to achieve any chosen targets for budget deficits and debt. It also means the government would have less flexibility to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or wars.
Source: IMF Fiscal Monitor
Note: The aggregate public-debt-to-GDP series for advanced economies and emerging market economies is based on a constant sample of 25 and 27 countries, respectively, weighted by GDP in purchasing power parity terms.