Nations have each developed individual responses to the ongoing COVID-19 pandemic. One common thread running through many of their efforts is the accumulation of national debt to fund relief programs. This comes at a point where the global debt load is already at record highs.
Finance expert Darren Herft shared his views on global debt with us and how countries should address the issue.
Herft studied business and accounting at Griffith University and has developed keen insights into finance through his long and varied business career. Herft has a particular focus on the ways that early-stage investment can propagate. He also believes that innovation could be the solution to the ongoing issue of global debt.
The current strategy of continually increasing the debt load is working, for now, due to historically low interest rates.
Herft says that, “We’re living in a world of very low interest rates, but that if rates were to rise again, the cost of servicing debt will increase.”
“This puts a lot of pressure on people individually, but also puts pressure on property markets and share markets.”
Carrying a substantial debt as a nation, business, or individual, is only viable with our current low interest rates. A sharp rise in interest rates could quickly lead to unmanageable payments. Herft says that, instead of incurring continual deficits, countries should encourage the innovation that drives businesses forward. Innovation can produce the increased revenue that countries need, without the risks inherent to large debt loads.
Herft also told us that, “Innovation provides one major solution for countries around the world on how they can reduce their debt.”
Any bold new startup venture founded today starts out with a value of precisely zero. As the company develops, they build up real value that they bring into the economy. These companies create new jobs and generate taxable revenue. This, in turn, leads to increased payroll and corporate taxes for the government. It’s essential to see the effect of increased innovation at the national level.
Of course, not every new venture will succeed. Still, those that do will be continually adding value, creating new technologies and innovations that will have long standing effects on the economy.
One real-life example of how government support for innovation can drive economic success is Canada’s Industrial and Technological Benefits Policy. The program was launched in 2014, with the goal of creating new jobs, driving innovation, and fostering economic growth. The policy includes investments in small and medium-sized enterprises and supporting research and development at Canadian post-secondary and research institutions.
As of 2020, the ITB Policy contributes an estimated 46,000 total jobs to the Canadian economy, making up 5 billion dollars of their annual GDP. The projects supported by this policy cover a wide variety of industries, including aerospace, information technology, and marine technology. The project currently supports over 400 small and medium-sized businesses.
The success of this program demonstrates very clearly Herft’s assertion that supporting innovation can provide opportunities for new businesses to expand and succeed, creating more jobs and more revenue. New technologies continue to open up new avenues to success for businesses.
Herft says that innovation is adding new sources of value revenue profitability. The single most remarkable example of this today is the information technology sector. This industry did not exist at all mere decades ago, and today accounts for six percent of the United States’ GDP. It’s also the fastest growing industry, increasing over eight percent between 2018 and 2019.
If something as game-changing as the internet can arise and dominate the landscape so quickly, who knows what else innovative ventures could bring us? Herft believes that stimulating this kind of innovation, both in creating new industries and improving the old, can leave countries better situated to handle the unknown future.
The low interest rates that have enabled countries to stockpile debt could also be part of the solution. Low interest rates favor aggressive borrowing. This might not be an attractive long-term solution for nations to fund their programs, but it is an excellent way for startup ventures to fund their endeavors.
New businesses can take out substantial loans with very low servicing costs at current interest levels. When these companies succeed, they produce increased revenues and create new jobs, driving the economy, and paying taxes. There is a net gain for all parties involved, with the businesses creating real value. Herft says that the opposing strategy of countries borrowing to fund personal subsidies instead simply increases the overall debt load.
The innovation that drives industry does more than just increase government revenues and GDP. Exciting new ventures and research improve the quality of life across every domain. Innovations in medicine have increased life expectancy drastically. Innovations in technology have reduced the price of electronics to the point that a private citizen can own a computer, an unthinkable feat 50 years ago. These benefits were achieved by the constant drive of innovation.
It’s important to remember that current global debt levels could quickly escalate into a crisis. Herft explains that any increase in interest rates “puts enormous pressure on countries with their net debt.” The time to encourage innovation is now, as the low interest rates favor innovation as well. Once interest rates start to climb, and the crisis becomes apparent, investing in innovation will only become more difficult.
Herft’s message on innovation isn’t a dire warning but rather a hope that countries could one day soon adopt more responsible economic policies. He is focused on exploring solutions through innovation and reducing national debt through innovative industries. A commitment to driving innovation could be the key to building a better world during our present opportunity.
With countries around the globe reevaluating their economic outlooks during the pandemic, hopefully, some will arrive at the same conclusion that Darren Herft has.
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