With the new tax overhaul, U.S. government debt will rise by one to two trillion dollars over the next decade. I view that assessment as majorly optimistic as it assumes no recession and unlikely growth.
Japan’s government carries debts at 240.3% of gross domestic product, far and away the world’s largest burden. Japan has struggled in recent decades to tackle its debt, in part because its economy has been stagnant. Attempts to raise revenue via higher taxes have often knocked the economy into recessions. Tax cuts haven’t generated enough growth to ease debt burdens.
The Bank of Japan has embarked on the world’s most aggressive monetary policies, including decades of rates near zero, and the world’s largest asset-purchase program. None of it has revived growth or inflation, meaning Japan’s debt burden has been slowly grinding higher. (Although the low rates have meant the costs to the government of servicing that debt have remained under control.)
Japan’s government debt has been a persistent fiscal challenge, but never quite blossomed into a full-blown crisis.
The next three nations haven’t been so lucky. Greece’s debt-to-GDP stands at 180.2% of GDP, Italy’s at 133% and Portugal’s at 125.7%. When the global financial crisis struck, and government revenues plunged around the world, Greece and Portugal found themselves unable to manage debts on their own. Both nations turned to international bailouts to make it through the years of weak growth that followed. All three nations have had to bail out some of their largest banks in order to keep their financial systems from collapsing.
All three have also turned to painful budget cuts in an attempt to control their debts’ rise. Some have argued these austerity measures, however, often backfire. Cutting pensions and government employees might relieve long-term debt, but do so at the cost of additional joblessness and economic stress.
All three nations are part of the eurozone, which like the Bank of Japan has kept rates low and engaged in large stimulus programs. But unlike Japan, the three highest-debt European nations do not directly control their own currency.
As recently as 2001, the U.S. debt for the size of its economy was 93rd out of 169 nations ranked by the IMF that year. By 2008, the U.S. debt had risen to 23rd out of 184, thanks to a combination of factors including a recession in 2001, the start of the global financial crisis in 2007, a pair of massive tax cuts in the early 2000s that did not produce the hoped-for growth benefits, and two expensive wars.