Global debt crisis will mean higher taxes – or worse

Taxpayers everywhere should brace themselves. Their taxes could soon rise unless there are fundamental changes in the way that increasingly unsustainable government debt in the United States, Japan and beyond is financed. This can be done, but it will involve tough political decisions.

Attempts by national leaders to boost defence and other spending in the wake of a profligate borrowing boom make a crisis inevitable. While stock markets continue to ride high, the stress in key global bond markets is beginning to show through as a warning signal to investors.

An insufficient proportion of income and savings in major countries is being directed into financing public spending on defence, health, infrastructure, climate change remediation and other priorities. Governments normally turn to borrowing to plug the gap between tax revenue and spending, but bond markets around the world are in revolt, as shown by rapidly rising yields on sovereign bonds.