Doha: QNB noted in its weekly note that G-7 countries’ fiscal conditions are set to deteriorate on the back of a high demand for more government spending, high nominal policy rates and the deployment of fiscal-monetary coordination.
QNB said that embracing Keynesianism, while beneficial in overcoming economic recessions and depressions, leads to a strong tendency for government debt to accumulate. It noted that G-7 countries government debt as a percentage of GDP has expanded from 75% to 126% in less than a generation from the beginning of the new millennium. The bank said that, despite improvement in the metric post pandemic, fiscal conditions are likely to deteriorate further across most of the G-7 countries due to three main factors.
The first is that all G-7 countries have widened their deficits since the pandemic, irrespective of the post pandemic recovery, including Germany, which pre pandemic was the only country with structural surpluses within the G-7. The bank noted that the result is a more constant requirement for further government spending that cannot be easily funded by new taxes, given the overall high level of taxation across most of the G-7 and the impact of higher taxes on competitiveness.
The second is that rate policies are significantly higher than long-term nominal GDP growth in all G-7 countries, with Japan being an exception. The bank noted that this fact suggests a significant potential for fiscal de-anchoring due to unsustainable debt dynamics, with a further increase in debt-to-GDP ratios. It warns that the fiscal position can worsen rapidly in the absence of a significant cycle of policy rate cuts by the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Canada.
The third according to QNB is that the COVID-19 pandemic legitimized fiscal-monetary coordination.
“In normal circumstances, the combination of elevated indebtedness with wider fiscal deficits would produce large spikes in long term bond yields, tightening financial conditions and placing disciplinary pressure on governments. However, in order to prevent and suppress financial distress, central banks are now expected to intervene and support the government bond market should yields go up too much or too fast,” QNB notes.
QNB concludes its note by saying that while there are no major crises in sight to require a step change in indebtedness levels across the G-7, fiscal conditions look set to deteriorate as a result of the factors discussed.
Source: Qatar News Agency