The International Monetary Fund (IMF) has projected that global public debt will exceed $100 trillion by the end of this year, highlighting the urgent need for governments to implement stricter fiscal measures.
According to the IMF’s latest report, the ongoing rise in government debt, which was initially driven by the COVID-19 pandemic, has continued unabated as countries ramp up spending to stimulate economic growth.
The US and China, in particular, have been key contributors to this debt surge.
Calls for Fiscal Reforms
The IMF has advised advanced economies to take decisive action to stabilize borrowing. The fund recommended that governments should:
- Reprioritize spending,
- Implement entitlement reforms,
- Raise revenues through indirect taxation where rates are currently low,
- Eliminate inefficient tax incentives.
In addition to these measures, the IMF cautioned that fiscal pressures are likely to intensify in the coming years due to increased government spending on green energy transitions, ageing populations, and heightened security concerns.
Impact of US and Chinese Economic Policies
The IMF’s warning comes at a time when China is seeking to reinvigorate its economy with substantial fiscal stimulus.
Meanwhile, in the United States, the economic plans of both Donald Trump and Kamala Harris, who are expected to play key roles in the upcoming presidential election, are projected to further increase US federal debt by trillions of dollars.
The Committee for a Responsible Federal Budget recently published a report detailing the anticipated rise in federal debt levels under both candidates’ policies.
Bond Market Reactions
Rising concerns over swelling public debt have already impacted global financial markets, with government bond sell-offs reported in several major economies, including the UK and France.
These developments underscore the growing investor unease regarding long-term fiscal sustainability.
UK Budget and Eurozone Challenges
In the UK, Chancellor Rachel Reeves is expected to announce adjustments to the country’s fiscal rules in the upcoming Budget. The revisions may allow for additional borrowing, further contributing to public debt concerns.
Across the Eurozone, the European Central Bank (ECB) has warned that long-term economic challenges could strain public finances.
According to an ECB report, in order for Eurozone governments to achieve a debt-to-GDP ratio of 60% by 2070, they would need to increase their primary fiscal balance by 2% of GDP on average, starting immediately and continuing permanently.
The IMF report also noted a consistent trend among forecasters of underestimating how rapidly debt levels can increase.
Historical data shows that debt-to-GDP ratios five years ahead can often be 10 percentage points higher than initial projections.
This forecast serves as a stark reminder to governments of the importance of implementing fiscal strategies to prevent unsustainable debt growth in the future.
