By Tom Fairless 

FRANKFURT -- Governments around the world are loading up on debt, taking advantage of record-low borrowing costs to extend a long economic expansion and invest for future challenges.

Economists warned a decade ago that pushing public debt above about 90% of gross domestic product could hurt growth and increase the risk of crises.

Now they aren't so sure.

In a world of ultralow interest rates, some say higher public debt levels are feasible, even desirable. If sovereign-bond yields remain below economic growth rates, governments should be able to issue debt without having to pay for it later, argue economists including Olivier Blanchard, former chief economist of the International Monetary Fund.

Seizing the opportunity, governments in France, Italy, Spain and the U.K. are penciling in large budget deficits for the coming years that will push their national debts close to 100% of GDP or much higher. Japan recently announced a $120 billion fiscal stimulus to shore up growth, even though public debt is more than double the nation's annual economic output.

The U.S. has embarked on a borrowing boom, driving the annual budget gap above $1 trillion and total government debt above 105% of GDP.

But the shift is drawing censure from some regulators and international officials, who warn that high public debt still carries risks.

France's growing public debt "is a cause for concern, since it does reduce the room for fiscal maneuver in the event of a downturn in the economy," European Central Bank President Christine Lagarde told a French newspaper last month.

The European Commission, the European Union's executive arm, warned eight member countries in November that they risked breaching the bloc's rules, which require countries with debt above 60% of GDP to gradually reduce it.

Traditionally, economists worried high public debt would soak up funds that would otherwise be used for private investment, thereby lowering a nation's capital stock and productive capacity while driving up interest rates.

Today though, very low interest rates globally suggest ample capital relative to demand.

"These low interest rates are telling us that the funds available for private investment aren't especially scarce, so the costs we traditionally associate with high government debt aren't as high as previously thought," said Karen Dynan, former chief economist at the U.S. Treasury.

Higher public debt could have advantages, some economists say. It could satisfy a growing demand among investors for safe assets. It could substitute for a lack of policy ammunition among central banks, which have already cut interest rates close to zero or below. It could finance public investment in infrastructure, education, research and development, and climate-change mitigation, which could elevate potential growth.

However, some economists warn that low interest rates reflect slow growth, which makes it harder for countries to escape from under a mountain of debt. Countries with high debt are also less able to respond forcefully to economic shocks by increasing spending or cutting taxes.

"Over history, if high debt was not problematic, countries would be increasing their debts, because that's the easiest thing in the world for politicians," said William Gale, senior fellow at the Brookings Institution in Washington, D.C.

An IMF study published last month found that advanced economies face a substantially higher risk of entering a crisis if sovereign debt owed to foreign creditors exceeds 70% of GDP. For emerging-market economies, the threshold is 30%, according to the report, which examined more than 400 crisis episodes in 188 countries between 1980 and 2016.

Crucially, the researchers found that government bond yields often remain low for long stretches before shooting up at the onset of a crisis. That suggests governments shouldn't rely too heavily on current low borrowing costs.

"Governments should be wary of high public debt even when borrowing costs seem low," the researchers wrote.

The two European economies with the slowest economic growth rates over the past decade, Italy and Greece, started out with the highest public debts, notes Carmen Reinhart, a Harvard University economist. Ireland, which entered the crisis with low government debt, was quick to bounce back, she said.

Ms. Reinhart and Harvard economist Kenneth Rogoff co-wrote an influential 2010 paper that found countries with public debt above roughly 90% of GDP typically had slower economic growth.

The paper, which was used to justify austerity policies in Europe, examined data from 44 countries over about 200 years. It found that median growth rates were 1% lower than otherwise for advanced economies with public debt over roughly 90% of GDP.

Ms. Reinhart and Mr. Rogoff say their paper didn't forecast an immediate impact once government debt rises above a certain tipping point.

"Having debt rise from 89% to 90% is no more discrete an event than having your cholesterol level rise from 199 to 200, or driving your car at 56 miles an hour in 55 mph speed limit," said Mr. Rogoff. "There is no sharp discontinuity, and we never stated otherwise."

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

February 16, 2020 10:14 ET (15:14 GMT)