“A surge in food and fuel prices is raising pressure on governments around the world to pick up the tab for consumers,” says The Wall Street Journal. “Spooked by protests that have broken out recently from Bangkok to Sicily, many governments have adopted subsidies or tax breaks to shield households and businesses.”
Yet these handouts are causing government deficits and debt to balloon, just as borrowing costs are rising. In the eurozone, for example, governments are likely to run budget deficits of 4.5% of GDP on average this year.
Governments have become used to the idea that ever-higher spending is both “manageable and sensible”, says Mike Dolan on Reuters, thanks to years of low inflation and low interest rates. This assumption will now be tested by a sharp shift in the economic environment.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“In a one-two punch, pandemic lockdowns first floored borrowing rates and exploded government borrowing to prop up economies. But a rush to reboot created wild price distortions and supply bottlenecks that appear persistent and have now been exaggerated by an energy and commodity price squeeze since Russia invaded Ukraine.”
Interest rates are likely to rise in response, increasing the cost of carrying so much public debt, says asset manager Janus Henderson. Global government debt rose to $65.4trn in 2021, up 7.8%, with every country increasing its borrowing.
Yet interest costs were just $1.01trn – equivalent to a record low interest rate of 1.6%. In 2022, debts will rise further – to a forecast $71.6trn, up 9.5% – while higher rates will raise interest costs by an estimated 14.5%. The UK will see an especially sharp rise, because inflation-linked bonds account for around 25% of outstanding government debt.
• SEE ALSO: The bond-market bloodbath isn’t over yet
-
How to invest in nuclear powerWe need nuclear power to go green, says Dominic Frisby. But there is a better option than huge power stations
-
Chase slashes its easy-access savings rate – is it time to switch?The Chase easy-access savings account has proved popular with savers thanks to its competitive rate and bonus deals. But, as the rate has dropped, has it lost its charm?
-
Can Lebanon's struggling economy survive another war?Lebanon's economy has been in dire straits for decades, and now it is yet again on the brink of war. Are better times on the horizon?
-
Modi’s reforms set Indian stocks on fireIndian stocks pass a new milestone, but global fund managers are holding back. Are there signs of overheating?
-
How to improve economic output using the supply-side approachBoosting potential economic output through public investment is crucial, says David C. Stevenson
-
Is China following Japan's economy and stock market?China is dealing with deflation and an unappealing stock market. Is it following in the footsteps of Japan?
-
Will Mpox be the new Covid?Not if Mpox can be contained, says the World Health Organisation. But will it be?
-
Mexico passes controversial judicial reform – will it hurt investors?What will Mexico's new reform mean for investors and the country's economy?
-
Has the world conquered inflation?The Central Bank has tackled inflation around the world – but what was the pay-off?
-
Why are tourists a problem around the world?Tourists are good for the economy, but not always for residents, says Alex Rankine
