The great balancing act: Managing the coming $30 trillion deficit while restoring economic growth

June 24, 2020

Here is an excerpt from an article written by Rima Assi, David Fine, and Kevin Sneader for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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As they continue to grapple with a global pandemic, governments will need to manage deficits and debt-payment plans while finding the best ways to support economic recovery.

The dual imperative of our time is to save lives and safeguard livelihoods—and governments around the world are pulling out all the stops to do so. The resulting ramp-up of relief and stimulus spending to unprecedented levels has occurred just as tax revenues have slumped. As a result, government deficits worldwide could reach $9 trillion to $11 trillion in 2020, and a cumulative total of as much as $30 trillion by 2023.
Governments will need to find ways to manage these unprecedented deficits without crippling their economies. It is this challenge which creates the need for the great balancing act: managing the $30 trillion deficit while restoring economic growth. We believe that this can be done—but it will require governments and the private sector to work together like never before to lay the foundations for a new social contract and to begin shaping a postcrisis era of shared, sustainable prosperity.There is already concern that many countries will struggle to meet their commitments to creditors, sparking a debt crisis that would compound the economic crisis unleashed by COVID-19. Yet even if governments do avoid defaults, record public-sector debt levels could seriously dampen economic recovery if not managed effectively. Increased debt-servicing costs could crowd out vital investments in areas such as infrastructure and reskilling. Decisions to “print money” at scale could prompt a rise in inflation. And a big rise in taxation could hamper business innovation and growth and harm countries’ competitiveness.
Any of these paths could lead to a vicious cycle in which both economic growth and public revenues are suppressed for years to come. But governments have more power than is commonly assumed to manage larger deficits and to ensure that they sustain sound public finances and economic competitiveness for their countries—and so foster a virtuous cycle instead. For example, there are opportunities to improve the effectiveness of tax collection, including the use of accelerated digitization. And careful spending reviews can reallocate budgets to the highest priorities while delivering savings through better procurement and fraud reduction.
Potentially an even greater opportunity, and one that remains largely untapped, lies in creating transparency into governments’ entire balance sheets, including assets such as land and property and state-owned enterprises. There is considerable scope in many countries to manage and monetize such assets more effectively, both to strengthen fiscal sustainability and to support broad-based economic recovery.

There are also real opportunities to hone the design and the target of the massive relief and stimulus packages precipitated by the COVID-19 crisis. The measures announced to date amount to some $10 trillion worldwide, and this spending is likely to rise as governments move from immediate support to households and businesses toward fostering long-term economic recovery. Wisely structured stimulus measures—designed and implemented in partnership with the private sector—could help prepare workforces for a technology-driven future and improve the long-term competitiveness and resilience of key industries. Indeed, we believe the crisis presents a historic opportunity for government and business to forge a new social contract for inclusive, sustainable growth.

The world’s $30 trillion public-finance challenge

Governments have announced more than $10 trillion in relief measures, primarily for households and businesses. Among the G-20 nations, the fiscal measures announced in the COVID-19 crisis to date amount to an average of 11 percent of GDP—three times that of the 2008–09 financial-crisis response. In some countries, stimulus packages have reached more than 30 percent of GDP.

At the same time, the immediate shock of the crisis on companies and households, along with depressed GDP growth, is likely to reduce government revenues significantly. Worldwide, our analysis suggests that fiscal revenues could fall by between $3 trillion and $4 trillion (as much as 15 percent) between 2019 and 2020. GDP growth, along with government revenues, could take two or three years to recover to precrisis levels.

Given the combination of record stimulus measures and steep reductions in revenues, governments are taking a range of steps to manage public finances, including budget reallocation. But the bulk of the gap is being closed through debt. Our analysis suggests that the world’s governments will experience a record global fiscal deficit in 2020 of between $9 trillion and $11 trillion—at least triple precrisis levels and equivalent to 12 to 15 percent of global GDP. By 2023, the world’s governments could face a cumulative fiscal deficit of between $25 trillion and $30 trillion (As a result, sovereign-debt levels are likely to increase significantly across the world. The International Monetary Fund expects that sovereign debt in advanced economies will increase to 122 percent of GDP in 2020, up from a precrisis forecast of 105 percent. In emerging and middle-income countries, it is forecast to increase to 62 percent of GDP, up from 53 percent.

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Here is a direct link to the complete article.

Rima Assi is a senior partner in McKinsey’s Abu Dhabi office, David Fine is a senior partner in the London office, and Kevin Sneader, McKinsey’s global managing partner, is based in the Hong Kong office.The authors wish to thank Mael de Calan, David Chinn, Jonathan Dimson, Colin Douglas, Jeremy Giglione, Akash Kaul, Shikha Tewari, and Todd Wintner for their contributions to this article.
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