Impact of Covid-19 on global debt: a study of countries in the G-20 group

Dinesh Kumar Srivastava, Tarrung Kapur, Muralikrishna Bharadwaj and Ragini Trehan

MPRA Paper from University Library of Munich, Germany

Abstract: This paper highlights the prospect of a Covid-19 led upsurge in the government debt-GDP ratio of 19 countries in the G-20 group. Many of these countries have Fiscal Responsibility Legislations (FRLs) where government debt-GDP ratios have been tar-geted. A key policy implication of our findings is that most countries will find that the post-Covid slippage in their government debt-GDP ratio is so large as to call for major changes in their fiscal policy framework. In some cases, even a modification of their FRL may be warranted. The evolution of debt of these countries over the period 1996 to 2019 indicates that major economic crises have led to one-time upsurges in their debt-GDP ratios covering both government and private debt. These ratios tend to re-main at high levels well after the crises are over, showing downward rigidity. We esti-mate that Covid-19 induced increase in government debt-GDP ratio for the selected countries, would amount to 14.9% points on average which is more than 141% higher than the increase of 6.2% points resulting from the 2008 crisis. We propose a methodology to project the government debt-GDP ratio as a function of incremental borrowing relative to GDP, real GDP growth and GDP deflator-based infla-tion. We also estimate the relative contribution to the increase in government debt-GDP ratio, individually of these factors. We find that the upsurge in the Covid led government debt-GDP ratio is large because of the reversal of the role of the growth factor in explaining the change in the debt-GDP ratio between two successive years. In particular, instead of appearing with a negative sign, which is the case in a normal year, it appears with a positive sign in a crisis year. Further, the fiscal deficit-GDP ratio also increases due to large stimulus packages in a crisis year

Keywords: Covid-19; government debt; private debt; growth; inflation; 2008 economic crisis (search for similar items in EconPapers)
JEL-codes: E6 E62 H63 H68 (search for similar items in EconPapers)
Date: 2020-11-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

Published in Modern Economy 11 (2020): pp. 2152-7254

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