Debt Burden Threatens Fiscal Stimulus as Keynesian Economics Fades

The Keynesian economic approach has been a dominant policy tool since the Great Depression of the 1930s, helping economies avoid deeper downturns during major financial crises and shocks. However, this approach has left a growing burden: public debt.

The rising debt levels have narrowed the fiscal space for governments to spend their way out of crises, as high debt servicing costs and growing pressure to increase defence spending are weighing on growth in advanced economies such as the US, Japan, and the UK. Andy Haldane, former chief economist at the Bank of England, questions whether Keynes's theory is now dead or ineffective in high-debt countries.

The impact of fiscal stimulus also depends on central banks' policies, with evidence showing that public stimulus could depress growth in countries where public debt exceeds 60% of GDP. The US national debt has reached $40 trillion, more than double its level a decade ago, reflecting heavy public spending and higher interest payments.

Bangladesh is facing a different equation, with domestic borrowing costs currently providing some relief despite rising external debt repayments posing growing risks for the country. Analysts warn that foreign borrowing needs to be channelled into productive sectors to avoid a debt trap in the future.