Are rich countries facing a debt crisis?

Henry, if I start with you, just take us. through what's been happening to public. debt in advanced economies. It's at a. really historical high across advanced. economies. It's higher than it's been at. any time since the Napoleonic War. Why. is this happened? It's happened for a. few reasons. One is that in recent years. we've had or recent decades I should say. we've had a series of crises, the global. financial crisis, the COVID-19 pandemic, the energy crisis in Europe, which has. led to sort of step changes in public. debt. But it's also because politicians.

just seem addicted to big deficits. They. they they really struggle at the moment. to balance spending and taxes. And so it. continues to mount up and that's got. more fundamental political causes if you. like. >> I think the sort of fascinating thing. being here is how much of a. you could call it a studied indifference. there is. It's it's the elephant in the room. Nobody wants to look straight into the. sun and engage with this directly. I. think there's a bit of triumphalism to. some degree. The US recoveries from the.

global financial crisis and from the. COVID pandemic were substantially. stronger than most developed economies. And there's a sort of vibe, a sort of. idea that American growth. will sort of rescue the country from. these things. To the extent that people. want to talk about them at all, there is I would say very little energy. on either side of the political divide. for seriously looking at the deficit and.

the public debt and looking at ways that. it might be resolved. If you go back and. this is true across across advanced. economies, if you go back and look at. the debt that was projected, inevitably. the debt ends up higher. That's partly. because these budget forecasters aren't. looking at whether there's going to be a. pandemic for instance or or the outbreak. of war. That's not part of budget. forecast, but it's also because in some. cases, for example in Britain, there's. just been too much optimism about. productivity growth. So,

you have you you have this overall. picture of high debts, high deficits, pressure on the public finances. You've. got aging populations which mean more. spending on health care and on pensions. You've got the pressure especially in. Europe to spend more on defense. You've. got the green transition. And it's not. just that debts are high, interest rates. since the pandemic have gone up a lot. So more and more spending's going on. interest payments as well. So you have. this upward pressure on debt. And then. you get to the fact that even if you do.

write down a forecast incorporating all. those things, you're probably, if. history is any guide, being too. optimistic about where debt is heading. So you put that all together and it is. quite an alarming picture. Japan showed. for a long time that you can have high. debt and low interest rates. If we go. back to a low rate world, you can have. high debt again. But what high debt. means is that you're vulnerable because. the higher your debt, the smaller the. increase in interest rates needed for. you to suddenly have a really bad. problem and to all of a sudden. face a choice between economic crisis or.

doing quite deep austerity and quite. deep adjustments. Even if you can get to. a situation that looks stable, the. higher your debts, the more easier it is. for things to suddenly become unstable. when circumstances and especially global. interest rates change. So, one. conventional way possibly is to. raise revenue, is for governments to. raise more revenue or to shrink their. spending. And what are the prospects for. taxes to go up in the rich world you. think, Henry? Basically varies by.

geography. If the United States wanted. to correct course fiscally with taxes. tomorrow, it could do it. And actually. in a speech by Greg Mankiw, who's a. Harvard economist recently, I think he. had some line where he says, you know, if you wanted to fix this problem over. the weekend, you could. The US has no. value added tax. It's the value added. tax. which lots of European states have, is quite a low impact tax on the. economy. And you can raise a lot of. money with it. And traditionally. Republicans in the US have opposed that.

tax precisely because it's such an easy. way to raise money and make the. government bigger. But America's taxes. is a low enough that they could do that. But the political will isn't there to do. it. And then you have a kind of range. Japan is kind of between Europe and the. US. In Britain there's a lot of talk. about taxes being at historical highs, which is true. But Britain has been on. the low end of the European range. historically. But another thing to. remember is the higher your taxes are, the more important it is that they're. well-designed taxes. And if you're going.

to go into a populist moment where your. tax system's going to be, you know, wealth taxes and all kind you know, you're not going to pay heed to economic. efficiency and to growth arguments, then. you might do damage at lower lower. levels of taxes as as well. So I'm not. I'm not optimistic basically about about. solving the problem through tax. The. problem is that cutting spending is. going to be very difficult as well. You've got pressures as Henry you were. talking about, you've got pressures on. the budget from defense spending, from. the need to decarbonize. And those. pressures are even stronger in Europe,

which has to really up its defense. budgets to match new NATO commitments. And then on top of that you've got an. aging population, which means a bigger. pension bill and which also means that. it's it's quite hard to win support for. any cuts to to benefits. And I think we. have a chart which illustrates this. Here we go. And this is a chart that. shows federal spending in America, but. the picture is broadly the same in other. rich countries. And you see that about.

2/5 of spending. goes on age-related. benefits. And defense here is not. growing in. America as a share of total spending, but it will be in Europe. So the. pressures on the budget are large and. the political will possibly to shrink it. is is hard to imagine. What do you agree. with that, Henry? Yes. I love this chart because it basically. shows how the purpose of government has.

almost completely changed in half a. century. When government starts, it's. about national defense. And in that. other other category, you have. infrastructure spending for instance, another thing people complain about. being too low. Then gradually over time, the government sort of turns into this. insurance company that provides old age. benefits. And there's a there's a little. bit of. Medicaid in there growing you can see as. well, which is health insurance for the. poor, which you might also put in the. entitlement bucket. And why does that. happen? Well, it happens in conjunction. with the aging population because you.

have more. elderly people. The retirement age. doesn't go up in line with life. expectancy for a long time. And also the. political power of an aging population. is is very great. You know, in the. mid-20th century, when. welfare states got going, people said, you know, they will be captured by. populists at the ballot box. But people like Friedman, Milton. Friedman, had this concern that. you'd have a kind of populist coalition. of the middle classes voting themselves.

benefits. No one really saw that what. you would have is this elderly. electorate making it impossible to cut. pension spending. But that's what you've. got. So it's just very very difficult to. see how politicians can resist that. pressure. But then look at the rest of. the budget, what else is there to cut. really? There there there isn't there. isn't much left. So again, I'm. Mr. Pessimist here. I find it I find it. difficult to see the spending adjustment. here. [Music].