Experts see higher taxes coming
Policymakers are gambling that they will be able to pay back the large increases in national debt accrued in response to the Covid-19 pandemic.
As Covid-19 brought economies to a standstill, many governments threw a lifeline to businesses and households in the form of fiscal support, but putting public debt back on a sustainable path is likely to mean higher taxes and less government spending in the future.
That was the message from an economist at the virtual Bermuda Captive Conference.
Henk Potts, director, investment strategy, at Barclays Private Bank, also said there could also be an acceleration in deglobalisation as a result of the health crisis.
Mr Potts said governments around the world had altered their fiscal policies to deal with the immediate needs of their countries during the pandemic, and if they had not taken such actions “long-term growth to the global economy would have been much worse, and humanitarian damage would have been far greater”.
He added: “However, the policy initiatives that have been put in place are by no means a risk-free debt. Fiscal debt, public debt, has been skyrocketing with government borrowing in many countries soaring to levels not seen since the 1940s.”
Servicing that debt has been made possible by historically low interest rates, Mr Potts said, but he warned that public debt has to eventually return to a sustainable path.
“Therefore, there will be a need at some point for longer term constraint on fiscal policy, and that will inevitably filter through to higher taxes and substantial cuts in government spending. The risk is that there is a lack of ammunition for the next time there is an economic downturn,” Mr Potts said.
“We should appreciate that in the short-term, policymakers are really gambling, they are doubling-down on the fiscal response today in an effort that they believe can boost their recovery, thus making it easier to pay those outstanding markets. This will have an effect in terms of policy for a long period of time.”
Daragh Maher, head of research, Americas, at HSBC, who was also a speaker at the economists' view session, warned of the potential impact on European Union cohesion as governments work to address increased debts.
He said: “Some countries in the eurozone are going to have high debt ratios. How are they going to put government finances back?”
Mr Maher said that if conversations about reducing debt happen while there are elevated unemployment levels, relative to pre-pandemic, it could increase polarisation in Europe, which often goes alongside EU scepticism.
While Mr Potts said the pandemic could accelerate deglobalisation “which you could argue started with the trade war [US and China]”.
He said: “Covid-19 has prompted governments to promote self-sufficiencies in strategic areas like food, healthcare and defence.”