Governments should consider removing tax breaks accorded to households and corporations for borrowing if they wish to bring debt levels down to manageable levels, a BIS survey said Saturday. The study published on the Bank of International Settlements' website noted that tax policies may have played a role "in making the level of debt higher than it would have been otherwise."
Such debt-friendly policies include preferential interest payments for firms to issue debt or tax relief for mortgage interest payments. But while a certain level of debt can boost growth through corporate investments or lend stability by promoting home ownership, excessive indebtedness can have negative effects.
Once public debt reaches a level of 85 percent of gross domestic product, further increases in borrowing would begin to hurt growth, said the study. A further 10 percentage point rise would cut growth by more than a tenth of a percentage point, it estimated. Meanwhile, for corporate debt, the threshold is at about 90 percent, while for household debt, the turning point when debt becomes counter-productive is at 85 percent of GDP, said the study.
Debt levels in advanced economies are currently already at levels where borrowing is hurting growth. "Over the past 30 years, summing these three sectors together, the ratio of debt to GDP in advanced economies has risen relentlessly from 167 percent in 1980 to 314 percent today, or by an average of more than 5 percentage points of GDP per year over the last three decades," said the report. While current focus is trained on the public debt crisis engulfing the
European Union, it is not just governments that are driving the increase in borrowing, but also households and corporations. Governments account for 49 percentage points of the 30-year rise in debt levels. Corporations were not far behind with 42 percentage points while households accounted for the remaining 56 percentage points. The study urged advanced economies to "act quickly and decisively to address their looming fiscal problems" and rein in public debt.
"The longer they wait, the bigger the negative impact will be on growth, and the harder it will be to adjust," it noted. Beyond reining in public spending, governments need to tackle private debt as reducing private debt levels would also benefit state coffers. It is simply more difficult to raise taxes from highly indebted populations or corporations.
To cut private debt, current efforts are focused on raising the cost of borrowing and making funding less available to borrowers, but the BIS research said more needs to be done. "Maybe we should go further, reducing both direct government subsidies and the preferential treatment debt receives. In the end, the only way out is to increase saving," it said.
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