Low interest rates may not be doing much for the savers among us, but they’re yielding all kinds of benefits for the spenders—including governments.
Researchers at the Organisation for Economic Co-operation and Development estimated how much governments would save on borrowing costs between 2015 and 2017 as a result of low interest rates. To do this, they looked at the difference between what governments would have paid if interest rates on 10-year bonds stayed at 2014 levels versus what they are now. They based their calculations on debt levels from the end of 2014 and assumed 15% of the issuance matures each year.
Using the OECD estimates, the US could save $139 billion in the three-year period, which is 1.4 times the 2016 transportation budget. The UK would save about £35 billion ($45 billion), slightly more than the public investment in infrastructure in the last fiscal year.
Here’s a look at the savings as a percentage of gross domestic product.
Because public borrowing and interest rates change so much, these are very rough calculations, but they provide a sense of the vast savings governments are making thanks to central bank policies. Last week, almost half of outstanding European government bonds, about $4.5 trillion worth, had yields below zero, according to Tradeweb. In some countries, bonds are even being sold with negative yields, meaning the governments are effectively being paid to borrow money.
So why aren’t governments ramping up their spending?
The continued frugality of major economies goes against the advice of fiscal spending advocates like former US Treasury secretary Larry Summers, who says there’s no danger of over-investing in infrastructure, and that the government should do so while long-term borrowing costs are near zero.
The OECD warns that with the fiscal pursestrings kept tight, central bankers have become “overburdened” in the fight against deflation—and their policies are causing distortions in financial markets. Bond, equity and real asset prices are rising all at once and are vulnerable to a sharp correction, the OECD said in its interim economic outlook (pdf) published Sept. 21.
The warnings came as the OECD forecast global economic growth to be slightly slower this year than last year. The report raises the specter of a “low-growth trap,” a cycle of low expectations depressing trade and investment that in turn diminishes growth expectations:
The difficulties of agreeing on effective responses to policy challenges and growing political tensions in many countries are significant downside tail risks for the global economy.
The pressure on governments to increase spending is mounting. Germany’s commitment to a balanced budget has become a serious point of contention in Europe. The persistent budget surplus has come under attack from the International Monetary Fund, other European governments, the Financial Times, and the Economist.
All countries have room to increase infrastructure spending and use fiscal measures to implement structural economic reforms, the OECD said in its report. It also recommends collective action by major economies to increase public investment.
Germany has made some effort by publishing plans for long-term investment in infrastructure spending. In the UK, where the previous chancellor lent toward spending cuts and reducing the deficit, the new chancellor says he might “reset” Britain’s fiscal policy in the wake of the Brexit vote. And in the US, both of the major presidential candidates have committed to much more infrastructure spending. It’s a promising start. But it’s clear there is much more that rich nations could do to support the efforts of central banks to boost growth.