Covid-19: How much debt is too much for governments?

The new conventional wisdom in these unconventional times is that governments can borrow and spend without limit to support the economy. But the fact is there is always a limit, and it may come into view sooner than many realise

Public spending, however, must be sensible, not based on magical monetary thinking.

As the Covid-19 pandemic rages, governments in advanced economies have opened their coffers to support households and small businesses, spending in the order of 15%-20% of GDP in many cases. Cumulative debt levels now exceed GDP in many developed countries; and, on average, debt as a share of GDP is approaching post-World War II highs.

Nonetheless, according to Olivier Blanchard and other economists, advanced economies can afford to take on much more debt, given the low level of interest rates. Calculations using International Monetary Fund data show that in the two decades before the pandemic, sovereign interest payments in these countries fell from over 3% of GDP to about 2%, even though debt-to-GDP ratios increased by more than 20 percentage points.