The International Monetary Fund (IMF) has raised a red flag with unusual seriousness. In its latest Fiscal Monitor report released on Wednesday, the international financial institution expressed deep concerns about the alarming trajectory of global public debt. Paradoxically, despite a favorable economic situation prior to the outbreak of the conflict in Iran, countries have generally failed to reduce their levels of debt, thus deepening vulnerability to future crises.
“The economy remained relatively robust before the war, and growth was generally satisfactory from a global perspective. Despite this favorable situation, we have not seen any measurable progress in reducing deficits and debt,” lamented Era Dabla-Norris, Deputy Director of the IMF’s Fiscal Affairs Department, in an interview with AFP.
To grasp the magnitude of the current crisis, it is essential to trace the spectacular evolution of global public debt since the 1970s. At that time, most countries maintained relatively modest debt ratios, generally below 40% of GDP for developing countries.
The oil shocks of 1973 and 1979 marked the beginning of a new era. Governments gradually abandoned post-war fiscal discipline in favor of expansionary policies. The 2008 financial crisis was a decisive turning point, forcing states to deploy massive stimulus plans that ballooned deficits. This dynamic worsened with the growing issues of over-indebtedness observed in many developing countries.
The Covid-19 pandemic has further disrupted the balance of global public finances. Exceptional support measures to safeguard economies have propelled global public debt to unprecedented levels, now reaching 94% of global GDP according to the latest IMF estimates.
The Washington-based institution’s projections paint a particularly bleak picture. Without a radical change in trajectory, global public debt could surpass the symbolic threshold of 100% of global GDP by 2029. This prospect is even more worrying given the current geopolitically tense context.
“In light of the median scenario of global growth, the risk of global debt could reach 116% of GDP, and even 120% in the worst-case scenario,” warned Era Dabla-Norris. “This is a level we have only seen during the height of World War II.”
These figures reveal the magnitude of the challenge awaiting policymakers. The international organization emphasizes that the crisis triggered by the conflict in Iran could further aggravate the situation of global public finances, as illustrated by the downward revisions to the French growth forecasts.
Several factors converge to explain this alarming debt spiral. Primarily, the widespread trend towards fiscal expansion, observed “everywhere in the world, regardless of political affiliations,” according to the IMF’s analysis. This direction results in increased public spending or decreased taxes, without sufficient revenue offsets.
The two largest global economies, the United States and China, bear particular responsibility in this dynamic. Regarding the United States, the IMF anticipates no long-term reduction in the deficit, which is expected to average 7.5% of annual GDP by 2031. This trajectory is projected to raise America’s net debt to 115.4% of GDP over the next five years, an increase of over 15 points.
The Chinese situation presents similarly concerning parallels, with a public deficit expected to be at least 8% annually until 2031 and gross public debt approaching 130% of GDP in five years, up from nearly 100% by the end of 2025.
This accumulation of staggering debt has cascading effects that are particularly worrying. The rise in interest payments constrains governments to divert precious tax resources from essential investments in health, education, and retirement systems.
“The consequence is that countries no longer have the necessary reserves when the next crisis hits, and they are left ill-prepared,” explained Era Dabla-Norris. This structural vulnerability exposes the global economy to future shocks with significantly diminished response capabilities.
The implications extend far beyond the national scope. The massive indebtedness of the United States, the world’s largest economy, “raises concerns about the sustainability of debt, not only for the United States but also for other countries whose access to financing could be complicated as American financing needs increase.”
In the face of this critical situation, the IMF advocates for a balanced approach combining various levers. The institution calls for “calibrated and measured” structural reforms to keep debt on a more sustainable path, accompanied by gradual fiscal consolidation. This latter is particularly urgent for the United States, which needs to reduce its deficit by 4 percentage points according to the institution. Furthermore, fundamental reforms to retirement and healthcare systems, especially in China, become imperative to address demographic aging. Lastly, improvement in tax systems would optimize public revenues.
Nevertheless, the international institution highlights some encouraging examples of positive development, citing Portugal, Spain, and Greece, which managed to restore their public finances after the eurozone crisis. These experiences demonstrate that fiscal consolidation remains achievable, even in unfavorable circumstances.
