Financing the Pandemic: The Political Economy of Rising Government Debt

This discussion paper advances the idea that the Covid-19 pandemic has been a seismic event for government economic policies around the world.

This paper advances the idea that the Covid-19 pandemic has been a seismic event for government economic policies around the world. Even after the pandemic is brought under control, its consequences are likely to have a major long-term impact on issues ranging from government fiscal behaviour to international borrowing and trade. Moreover, rising government debt will serve to tilt the economic balance between developed and developing countries in favour of the former due to the fact that developed economies have much wider fiscal flexibility than developing countries. However, in the case of a catastrophic economic downturn in developing countries, such as another lost decade of economic growth, there may be damaging side effects for developed countries as well. Unless developed economies act quickly and boldly to alleviate the debt burden of developing countries, the potential for a total collapse in international finance and trade will substantially increase. This may also lead to a new wave of migration towards developed countries, with significant implications for domestic politics in these countries.