IMF urges tighter fiscal policy as global debt nears historic peak

The International Monetary Fund (IMF) released the October Fiscal Monitor today. It projects that global public debt may exceed 100% of global GDP by 2029, surpassing the levels reached after World War II in 1948.

The IMF has urged policymakers worldwide to tighten fiscal measures and be prepared for potential financial shakeups due to increased borrowing costs. Victor Gaspar, the Director of the IMF’s Fiscal Affairs Department, noted that public debt risks have widened and will continue to grow even faster if no controls are implemented.

IMF says public debt may go beyond record set after WWII

Under an adverse but plausible scenario, the IMF cautioned that debt could rise as high as 123% of GDP by the end of the decade, approaching the record set just after World War II.

The financial institution revealed that debt ratios have increased due to a slow growth rate from governments, which has led to increased interest rates. It highlighted several factors driving the high public debt, including increased defense spending, aging populations, and the need for climate adaptation.

“After years of rising debt and falling interest rates, the environment has changed dramatically. Interest rates have increased; financial asset valuations have stretched. The greatest concern is financial turmoil, driven by fiscal-financial feedback loops.”

–Victor Gaspar, Director of the IMF’s Fiscal Affairs Department

Low interest rates emerged after the 2008 financial crisis, also contributing to high public debt before the COVID-19 pandemic, which led to increased rates. The latest Fiscal Monitor report builds on the April report, which issued the same warnings. The April report warned that global debt would surpass 95% of the worldwide GDP in 2025. 

Meanwhile, the IMF has projected that public debt will reach 100% by the end of the decade. The financial institution highlighted rising yields, widening spreads, and complex trade-offs between reducing borrowing and sustaining growth. 

The U.S. tariff wars introduced in April threatened growth in major economies, including the U.S., pushing public debt even higher this year as governments struggled with meeting defense and social spending. The April Fiscal Monitor report estimated that global trade tariffs could add approximately 4.5% to global GDP in the short term. 

IMF warns that the fiscal space is narrowing for large economies

Large economies, such as the U.S., China, Japan, France, Italy, Canada, and the UK, have either surpassed the 100% of GDP mark or will soon do so, according to the IMF. The report cautioned that the fiscal space for those economies is narrowing, and they may no longer enjoy the benefit of deep bond markets and investor confidence.  

The IMF also noted that small and emerging economies are at a higher risk of higher borrowing rates despite their low debt-to-GDP ratios due to limited fiscal capacity. The report added that low-income nations will be left to shocks from price swings, natural disasters such as the COVID-19 pandemic, and even renewed trade tensions. 

However, Scott Bessent, the US Treasury Secretary, has signaled that the US still has room to improve its fiscal balance. In an interview with CNBC, he stated that the deficit-to-GDP ratio may decrease to 3% in the short term from its current level of 5%. The current U.S. deficit for the fiscal year ending September 30 has not been released yet, following the ongoing government shutdown.

The IMF advised the U.S. to focus on deficit reduction, pension, and health care reforms to reduce and stabilize public debt. The financial institution argued that lowering the U.S. deficit would help rebalance the economy and improve the country’s economic conditions. The Fund also emphasized that redirecting a portion of current spending towards education and human capital investment, even if it’s just 1% of the GDP, could increase government revenue by more than 3% by 2050 in developed countries and 6% in developing economies. It also urged developing countries to strengthen their tax systems and maintain credible adjustment paths to avoid crises.

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