Global economic growth appears to be stabilizing and interest rates are declining, but these developments won’t solve a debt crisis that has been more than a decade in the making. The problem is rooted in systemic fiscal and monetary policy imbalances that are exacerbated by governance inefficiencies, external shocks, and volatile financial markets. Its short-term effects, such as unemployment, weakened financial stability, and depressed investment, undermine economic recovery, while its long-term consequences threaten sustainable growth.
Debt crises are often triggered by the rapid accumulation of public and private debt. Governments typically accumulate debt to protect against currency risks, while enterprises rely on credit to finance investments and expansion. As the debt levels rise, central banks raise interest rates to combat inflation and reduce the risk of a default. However, such rate hikes can raise borrowing costs and impose unsustainable debt service burdens on governments and businesses. Higher interest rates increase the cost of financing public spending, thus constraining investments and slowing economic growth. They also reduce tax revenues, which are required to service existing debt and invest in growth.
To avoid a debt crisis, governments need to build fiscal buffers by reducing expenditures and raising taxes on the wealthy and closing loopholes for tax evasion. Such measures lower income inequality and bolster faith in the government, which can help to stabilize the economy without overburdening low-income households. Tax reform can also boost government revenues by promoting a progressive taxation scheme, ensuring that individuals with greater financial capacity contribute proportionally more to the national budget.