1 00:00:02,360 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:08,760 --> 00:00:11,360 Speaker 2: I'm Stephen Carroll and this is Here's Why, where we 3 00:00:11,400 --> 00:00:13,640 Speaker 2: take one news story and explain it in just a 4 00:00:13,680 --> 00:00:20,000 Speaker 2: few minutes with our experts here at Bloomberg. That fiscally 5 00:00:20,320 --> 00:00:23,880 Speaker 2: fraught for I think are very vulnerable to the significant word. 6 00:00:23,920 --> 00:00:27,400 Speaker 1: Cellot Luke own you warning that the deficit could actually 7 00:00:27,440 --> 00:00:29,520 Speaker 1: reach a six percent. 8 00:00:29,360 --> 00:00:32,080 Speaker 2: Large esteined fiscal deficits we've seen in a really long time. 9 00:00:32,080 --> 00:00:35,280 Speaker 2: Those are pushing our star hire. The US fiscal situation 10 00:00:35,600 --> 00:00:37,919 Speaker 2: is that of a nation that's trying to work its 11 00:00:37,920 --> 00:00:38,920 Speaker 2: way over recession. 12 00:00:39,520 --> 00:00:42,760 Speaker 1: High level of deficit, it is potentially inflationary. 13 00:00:42,840 --> 00:00:45,400 Speaker 2: There are still people who peddle the idea that we 14 00:00:45,479 --> 00:00:50,680 Speaker 2: could just abandon economic responsibility, cast off any constraints on spending. 15 00:00:51,760 --> 00:00:56,760 Speaker 2: They're wrong. France's breaking records for short lived governments, Britain's 16 00:00:56,800 --> 00:00:59,600 Speaker 2: Labor Party has seen its popularity collapse within a year 17 00:00:59,640 --> 00:01:03,520 Speaker 2: of its slide election win, and by contrast, Italy's current 18 00:01:03,600 --> 00:01:06,520 Speaker 2: government is one of the most stable in recent history. 19 00:01:07,200 --> 00:01:10,080 Speaker 2: Governments across the developed world are more in debted than ever, 20 00:01:10,319 --> 00:01:14,280 Speaker 2: forcing difficult choices from politicians who see a greater proportion 21 00:01:14,360 --> 00:01:18,200 Speaker 2: of their public finances going to servicing their debts. How 22 00:01:18,240 --> 00:01:21,880 Speaker 2: they address this challenge is also now even more closely 23 00:01:21,959 --> 00:01:25,880 Speaker 2: tied to their political fortunes. Here's why debt is now 24 00:01:25,920 --> 00:01:30,520 Speaker 2: a driving political force. Our head of Economics and Government, 25 00:01:30,520 --> 00:01:34,000 Speaker 2: Stephanie Flanders, joins me. Now for more. Stephanie, First of all, 26 00:01:34,200 --> 00:01:37,240 Speaker 2: how big a problem is debt in developed economies? 27 00:01:37,400 --> 00:01:38,959 Speaker 1: Well, I guess the quick thing to say is it's 28 00:01:38,959 --> 00:01:41,600 Speaker 1: a much bigger problem than it was ten or fifteen 29 00:01:41,920 --> 00:01:46,039 Speaker 1: years ago. Before the global financial crisis, the early years 30 00:01:46,040 --> 00:01:49,800 Speaker 1: of the two thousands, we used to talk about debt 31 00:01:49,880 --> 00:01:52,880 Speaker 1: in advanced economies being in the range of forty to 32 00:01:52,920 --> 00:01:56,360 Speaker 1: seventy percent of GDP. There were exceptions to that, but 33 00:01:56,400 --> 00:01:59,160 Speaker 1: you remember, even when countries joining the Eurozone, they were 34 00:01:59,160 --> 00:02:01,960 Speaker 1: supposed to get to a around sixty percent of their 35 00:02:02,040 --> 00:02:05,040 Speaker 1: national income level of debt, and that for most countries 36 00:02:05,120 --> 00:02:06,800 Speaker 1: was not a big heavy lift. But when we had 37 00:02:06,800 --> 00:02:09,080 Speaker 1: the global financial crisis, governments had to bail all the 38 00:02:09,120 --> 00:02:11,600 Speaker 1: banks out and support the economy for a long time, 39 00:02:11,960 --> 00:02:15,440 Speaker 1: we had debt take a step change up. And then 40 00:02:15,639 --> 00:02:18,240 Speaker 1: another step change came when we had COVID and all 41 00:02:18,240 --> 00:02:20,680 Speaker 1: the expenditure associated with that, and you end up with 42 00:02:20,720 --> 00:02:23,320 Speaker 1: a situation where debt has more or less doubled and 43 00:02:23,480 --> 00:02:27,680 Speaker 1: many economies relative to the overall size of the economy. 44 00:02:28,080 --> 00:02:31,320 Speaker 1: What's funny is that although the debt rose quite significantly 45 00:02:31,320 --> 00:02:33,920 Speaker 1: after the global financial crisis, it's really only been a 46 00:02:33,919 --> 00:02:37,680 Speaker 1: problem recently because you had a combination of high debt 47 00:02:38,080 --> 00:02:41,200 Speaker 1: and interest rates going up. You had an amazing situation 48 00:02:41,320 --> 00:02:43,560 Speaker 1: before that where although debt has gone up a lot, 49 00:02:44,080 --> 00:02:47,360 Speaker 1: the cost of servicing that debt had been going down 50 00:02:47,400 --> 00:02:48,840 Speaker 1: and down and down. You know, we went into this 51 00:02:48,919 --> 00:02:51,640 Speaker 1: era of sometimes having zero negative interest rates, and that 52 00:02:51,760 --> 00:02:54,480 Speaker 1: was making it very easy for governments to ignore the 53 00:02:54,520 --> 00:02:56,880 Speaker 1: problem of debt, the big stock of debt sitting there 54 00:02:57,120 --> 00:02:57,880 Speaker 1: but no longer. 55 00:02:58,360 --> 00:03:00,960 Speaker 2: When we think about the world's developed economies, are they 56 00:03:00,960 --> 00:03:03,080 Speaker 2: all in a similar boat? How similar, say, is the 57 00:03:03,120 --> 00:03:06,920 Speaker 2: situation in France or in the UK, both of which 58 00:03:06,919 --> 00:03:09,000 Speaker 2: are seeing impacts on the political scene. 59 00:03:09,280 --> 00:03:11,959 Speaker 1: There's some structural forces that are common to all countries, 60 00:03:12,000 --> 00:03:14,760 Speaker 1: and then there's specific things that are causing markets to 61 00:03:14,840 --> 00:03:17,200 Speaker 1: focus on one aspect more than another and making things 62 00:03:17,240 --> 00:03:19,600 Speaker 1: particularly difficult for government. So, you know, the structural things 63 00:03:19,639 --> 00:03:22,560 Speaker 1: are you know, I've already mentioned it. Interest rates have 64 00:03:22,680 --> 00:03:25,640 Speaker 1: taken this kind of step change up in response to 65 00:03:25,680 --> 00:03:28,440 Speaker 1: the inflation we had after COVID. That's made it more 66 00:03:28,480 --> 00:03:32,440 Speaker 1: expensive to finance the debt everywhere, and suddenly finance ministers 67 00:03:32,520 --> 00:03:34,920 Speaker 1: they're noticing that a much larger share of the money 68 00:03:34,920 --> 00:03:37,040 Speaker 1: coming in in tax revenues is going out in the 69 00:03:37,040 --> 00:03:40,000 Speaker 1: form of just servicing debt, which no finance minister really 70 00:03:40,000 --> 00:03:42,000 Speaker 1: likes to do. They want to spend on hospitals and schools, 71 00:03:42,000 --> 00:03:43,960 Speaker 1: and so the voters want them to do that. So 72 00:03:43,960 --> 00:03:47,920 Speaker 1: there's that structural problem. There's also the problems we often 73 00:03:47,960 --> 00:03:51,640 Speaker 1: talk about, aging populations, the pressure of health spending. All 74 00:03:51,680 --> 00:03:54,720 Speaker 1: of those things are not going away. I think what 75 00:03:55,000 --> 00:03:57,920 Speaker 1: is distinctive in different countries is how much those problems 76 00:03:57,960 --> 00:04:02,240 Speaker 1: are really sort of biting and inter reacting with the 77 00:04:02,240 --> 00:04:05,600 Speaker 1: politics of the country. So in the UK, the stock 78 00:04:05,640 --> 00:04:07,320 Speaker 1: of debt is actually not as high as it is 79 00:04:07,320 --> 00:04:10,119 Speaker 1: in France. It's around one hundred percent of GDP, and 80 00:04:10,720 --> 00:04:15,000 Speaker 1: we have a pretty sort of reasonable approach to stabilizing 81 00:04:15,040 --> 00:04:19,279 Speaker 1: that debt. But unfortunately we have very low maturity debt, 82 00:04:19,360 --> 00:04:21,320 Speaker 1: so our debt sort of rolls over very quickly. You 83 00:04:21,400 --> 00:04:23,599 Speaker 1: quite often have to go back into the market to 84 00:04:23,680 --> 00:04:26,680 Speaker 1: refinance your debt, and that means that it's been much 85 00:04:26,760 --> 00:04:29,920 Speaker 1: more susceptible to that rise in interest rates than say France, 86 00:04:29,960 --> 00:04:33,240 Speaker 1: which actually had slightly older debt, had a high maturity debt. 87 00:04:33,240 --> 00:04:35,560 Speaker 1: The average bit of debt owed to the French government 88 00:04:35,640 --> 00:04:37,880 Speaker 1: was kind of seven or eight years, and it's quite 89 00:04:37,920 --> 00:04:39,720 Speaker 1: a lot shorter than that in the case of the UK. 90 00:04:39,800 --> 00:04:42,880 Speaker 1: So there were specific things that cause the problem to 91 00:04:42,880 --> 00:04:44,760 Speaker 1: be different in different countries. In the UK it's a 92 00:04:44,800 --> 00:04:47,400 Speaker 1: sort of liquidity problem, not so much a stock problem. 93 00:04:47,400 --> 00:04:50,039 Speaker 1: People in the financial markets just worry a bit year 94 00:04:50,080 --> 00:04:52,159 Speaker 1: to year about how that money's going to be raised 95 00:04:52,160 --> 00:04:55,280 Speaker 1: to finance the debt. In France, it's more people look 96 00:04:55,279 --> 00:04:57,359 Speaker 1: at it and say, wow, they can finance it this 97 00:04:57,440 --> 00:04:59,240 Speaker 1: year and next year, but you know, when are they 98 00:04:59,240 --> 00:05:01,239 Speaker 1: actually going to bring it down? When is the political 99 00:05:01,279 --> 00:05:04,880 Speaker 1: system going to coalesce enough to actually take action on this. 100 00:05:06,040 --> 00:05:08,279 Speaker 2: Is the United States in the same situation or is 101 00:05:08,279 --> 00:05:09,960 Speaker 2: it exceptional in this regard? 102 00:05:10,520 --> 00:05:12,120 Speaker 1: So if you didn't know that you were talking about 103 00:05:12,120 --> 00:05:13,840 Speaker 1: the US and you just looked at their numbers, you'd 104 00:05:13,839 --> 00:05:15,800 Speaker 1: think it was sort of a worse case than Italy. 105 00:05:15,839 --> 00:05:18,280 Speaker 1: It's got a higher debt one hundred and twenty percent 106 00:05:18,320 --> 00:05:22,560 Speaker 1: of GDP, it has a higher fiscal deficit, it's borrowing 107 00:05:22,600 --> 00:05:24,719 Speaker 1: a lot, even though the economy has been very strong. 108 00:05:24,800 --> 00:05:27,960 Speaker 1: It's actually not in a recession, which is pretty unusual. 109 00:05:28,480 --> 00:05:30,760 Speaker 1: And it has a Congress and a president that have 110 00:05:31,400 --> 00:05:35,280 Speaker 1: now adding to debt, passing tax cuts and other things 111 00:05:35,279 --> 00:05:37,600 Speaker 1: that are costing a lot of money. If you didn't 112 00:05:37,640 --> 00:05:39,479 Speaker 1: know it was the US, you'd say all of those things, 113 00:05:39,480 --> 00:05:42,320 Speaker 1: it's heading for a disaster. What the US, but of 114 00:05:42,360 --> 00:05:45,640 Speaker 1: course is exceptional, and one of the big things it 115 00:05:45,640 --> 00:05:48,040 Speaker 1: has in its favor is the dollar as the reserve 116 00:05:48,080 --> 00:05:50,279 Speaker 1: currency for the whole world. It is also often a 117 00:05:50,360 --> 00:05:53,720 Speaker 1: safe haven for financial markets, and probably most important of all, 118 00:05:53,720 --> 00:05:56,440 Speaker 1: it's been growing a lot faster than the European countries 119 00:05:56,480 --> 00:05:58,200 Speaker 1: I've been talking about, so it doesn't have to work 120 00:05:58,240 --> 00:06:01,200 Speaker 1: so hard to finance that debt year to year, even 121 00:06:01,279 --> 00:06:03,919 Speaker 1: though it is growing and growing, and people do wonder 122 00:06:03,960 --> 00:06:06,599 Speaker 1: whether the situation is going to shift in the next 123 00:06:06,600 --> 00:06:08,760 Speaker 1: few years in terms of people worrying a lot more 124 00:06:08,800 --> 00:06:12,000 Speaker 1: about the US, but at the moment, surprisingly little. 125 00:06:12,440 --> 00:06:15,320 Speaker 2: How are political leaders dealing with the challenges then, of 126 00:06:15,440 --> 00:06:18,279 Speaker 2: higher debt and debt repayments are there good or bad 127 00:06:18,320 --> 00:06:19,760 Speaker 2: examples that we can look to. 128 00:06:20,600 --> 00:06:22,479 Speaker 1: I was thinking about this and I was all the 129 00:06:22,720 --> 00:06:24,560 Speaker 1: good examples I could think of, they all seem to 130 00:06:24,600 --> 00:06:26,560 Speaker 1: be a long time ago, and there's very few good 131 00:06:26,640 --> 00:06:29,719 Speaker 1: examples today. So if you look back in the early nineties, 132 00:06:29,800 --> 00:06:32,520 Speaker 1: Sweden had very high levels of debt and actually had 133 00:06:32,520 --> 00:06:37,040 Speaker 1: an interesting time where the Social Democrats, the left wing party, said, look, 134 00:06:37,200 --> 00:06:38,719 Speaker 1: as long as we haven't got on top of this 135 00:06:38,839 --> 00:06:41,760 Speaker 1: debt and spending, we're going to be beholden to the 136 00:06:41,839 --> 00:06:45,040 Speaker 1: financial markets. We won't have our own freedom of maneuver 137 00:06:45,080 --> 00:06:46,719 Speaker 1: as a country, and we won't be able to do 138 00:06:46,760 --> 00:06:48,480 Speaker 1: the things we want to do. And they took some 139 00:06:48,520 --> 00:06:51,719 Speaker 1: really difficult decisions at various times. Other countries do that. 140 00:06:51,720 --> 00:06:53,560 Speaker 1: We even saw it in the US in the eighties, 141 00:06:54,080 --> 00:06:57,160 Speaker 1: long term problems they were facing with social security got 142 00:06:57,200 --> 00:07:00,000 Speaker 1: fixed well ahead of time. In the UK as well, 143 00:07:00,080 --> 00:07:04,920 Speaker 1: had changes to pension rules that actually long term reduced 144 00:07:04,920 --> 00:07:07,200 Speaker 1: the cost of spending. There hasn't been a lot of 145 00:07:07,200 --> 00:07:08,560 Speaker 1: that in the last few years, I have to say, 146 00:07:08,560 --> 00:07:10,880 Speaker 1: And when you talk about how well politicians are dealing 147 00:07:10,920 --> 00:07:13,400 Speaker 1: with it, there aren't many that are really dealing with 148 00:07:13,440 --> 00:07:13,880 Speaker 1: it at all. 149 00:07:14,960 --> 00:07:19,600 Speaker 2: Can debt via the bond markets actually helped to rein 150 00:07:19,720 --> 00:07:23,040 Speaker 2: in politicians who might have more unconventional fiscal plans or 151 00:07:23,040 --> 00:07:25,240 Speaker 2: who are ignoring some of their debt problems. 152 00:07:25,840 --> 00:07:28,679 Speaker 1: I mean, that's what we've traditionally seen. And you know, 153 00:07:28,800 --> 00:07:30,760 Speaker 1: you remember there was that famous you know, the advisor 154 00:07:30,880 --> 00:07:33,800 Speaker 1: James Carville to Bill Clinton said or when I die, 155 00:07:33,840 --> 00:07:35,720 Speaker 1: I want to come back as a bond trader, because 156 00:07:35,720 --> 00:07:38,640 Speaker 1: they get to call the shots. And it used to 157 00:07:38,680 --> 00:07:41,440 Speaker 1: be that that kind of pressure did make a difference 158 00:07:41,600 --> 00:07:45,160 Speaker 1: to government's changing policy. And of course we've seen that 159 00:07:45,360 --> 00:07:47,679 Speaker 1: in extreme cases in the last few years. Liz trust 160 00:07:47,720 --> 00:07:51,800 Speaker 1: government was famously brought down by the bond market's reaction, 161 00:07:51,880 --> 00:07:55,720 Speaker 1: among other things, the bond market's reaction to her budget, 162 00:07:55,760 --> 00:07:59,080 Speaker 1: her emergency budget. But if you look at the US, 163 00:07:59,280 --> 00:08:00,920 Speaker 1: as I said before, but it just doesn't seem to 164 00:08:01,000 --> 00:08:02,680 Speaker 1: be operating in a way it might have done in 165 00:08:02,680 --> 00:08:05,440 Speaker 1: the past. I mean, the US is the only developed 166 00:08:05,440 --> 00:08:08,720 Speaker 1: economy to have seen its ten year cost of borrowing 167 00:08:08,760 --> 00:08:11,560 Speaker 1: actually go down slightly since the start of this year. 168 00:08:12,120 --> 00:08:14,160 Speaker 1: It had gone up a bit since before that. But 169 00:08:14,800 --> 00:08:18,080 Speaker 1: when you think about how much debt has now in 170 00:08:18,160 --> 00:08:19,960 Speaker 1: the future is going to go up as a result 171 00:08:19,960 --> 00:08:24,120 Speaker 1: of Donald Trump's big beautiful bill and the sort of 172 00:08:24,440 --> 00:08:28,320 Speaker 1: lack of responsible policy making in Washington. It's, in a way, 173 00:08:28,360 --> 00:08:30,680 Speaker 1: the bomb market's kind of letting the US off the hook. 174 00:08:31,360 --> 00:08:34,559 Speaker 2: Do we have any conception that voters are making political 175 00:08:34,640 --> 00:08:38,199 Speaker 2: choices because of the debt problem or paying attention to 176 00:08:38,240 --> 00:08:39,680 Speaker 2: it in a close way? 177 00:08:40,760 --> 00:08:42,960 Speaker 1: I mean, the curious thing about this is if you 178 00:08:43,040 --> 00:08:46,880 Speaker 1: look at opinion polls, the majority of voters, and probably 179 00:08:46,920 --> 00:08:49,920 Speaker 1: more than a few years ago, are worried about debt, 180 00:08:50,200 --> 00:08:52,920 Speaker 1: say it's a big problem that the government needs to fix. 181 00:08:53,400 --> 00:08:55,520 Speaker 1: In the case of the UK, people more generally are 182 00:08:55,559 --> 00:08:57,679 Speaker 1: sort of worried that the government has kind of lost 183 00:08:57,720 --> 00:09:00,480 Speaker 1: control of the economy, or at least has lost the 184 00:09:00,520 --> 00:09:02,360 Speaker 1: ability to do the things that it wants to do 185 00:09:02,440 --> 00:09:05,640 Speaker 1: because of this buying they're in over debt and the 186 00:09:05,679 --> 00:09:08,040 Speaker 1: low level of growth. But then you look at what 187 00:09:08,120 --> 00:09:12,440 Speaker 1: voters actually vote for, and by and large, they haven't 188 00:09:12,480 --> 00:09:15,040 Speaker 1: shown a great desire to vote for parties that are 189 00:09:15,080 --> 00:09:18,240 Speaker 1: promising tough decisions. You know, in the UK, one of 190 00:09:18,280 --> 00:09:21,880 Speaker 1: the things long term that's really affecting the structural increase 191 00:09:21,960 --> 00:09:25,640 Speaker 1: in spending is the pension's triple lock this commitment to 192 00:09:25,800 --> 00:09:30,319 Speaker 1: always increasing the state pension by either two and a 193 00:09:30,360 --> 00:09:34,440 Speaker 1: half percent or the right of average earnings or the 194 00:09:34,520 --> 00:09:37,280 Speaker 1: rate of inflation, whichever of them is higher. It's been 195 00:09:37,720 --> 00:09:42,440 Speaker 1: consistently rising the pension spending as a share of pretty 196 00:09:42,520 --> 00:09:46,160 Speaker 1: much everything. But no party, even when they pay lip 197 00:09:46,200 --> 00:09:48,960 Speaker 1: service to wanting to control the debt, is willing to 198 00:09:49,480 --> 00:09:51,800 Speaker 1: say to voters, you know what, that's got to change. 199 00:09:52,000 --> 00:09:55,080 Speaker 2: Okay, Thanks to you, Stephanie Flanders, our head of economics 200 00:09:55,240 --> 00:09:58,959 Speaker 2: and Government at Bloomberg. For more explanations like this from 201 00:09:59,000 --> 00:10:01,920 Speaker 2: our team of three thousand journalists and analysts around the world, 202 00:10:01,960 --> 00:10:06,679 Speaker 2: go to bloomberg dot com slash explainers. I'm Stephen Carroll. 203 00:10:06,880 --> 00:10:09,200 Speaker 2: This is here's why. I'll be back next week with more. 204 00:10:09,440 --> 00:10:10,200 Speaker 2: Thanks for listening.