The fund warned that this indicator is very high globally and expects it to approach 100% of GDP by 2030.
The International Monetary Fund (IMF) has warned that the global level of public debt is very high. It is expected to exceed US$100 trillion by the end of this year, or 93% of global GDP, and to approach 100% of GDP by 2030. This is 10 percentage points of GDP higher than the level observed in 2019, before the pandemic.
While the outlook for the fund is mixed – public debt is expected to stabilise or decline in two-thirds of countries – the IMF’s October 2024 Fiscal Monitor report suggests that future debt levels could exceed projections, and that a high probability of stabilising or reducing debt levels will require much larger fiscal adjustments than expected. The report argues that countries should address debt risks now through well-designed fiscal policies that protect growth and vulnerable households, taking advantage of the monetary policy easing cycle.
Worse than expected
The fiscal outlook for many countries could be worse than expected for three reasons: high spending pressures, an optimistic bias in debt projections, and substantial unidentified debt.
"Previous IMF research has shown that the discourse on fiscal issues has increasingly tilted toward increased spending across the political spectrum. In addition, countries will need to increase spending to address population aging and related health care; the green transition and adaptation to climate change; and defense and energy security needs generated by rising geopolitical tensions," the organization says.
On the other hand, past experience suggests that debt projections tend to underestimate actual outcomes by a considerable margin. On average, the five-year effective debt-to-GDP ratio can exceed projections by 10 percentage points of GDP.
The Fiscal Monitor presents a new “debt at risk” framework that links current macrofinancial and political conditions to the full spectrum of possible future debt outcomes. This method goes beyond the typical approach focused on point estimates of debt forecasts and helps policymakers quantify risks to the debt outlook and identify their sources.
The framework also shows that under an extreme adverse scenario, global public debt would reach 115% of GDP in three years, which is almost 20 percentage points higher than currently projected. This could be due to several reasons: weaker growth, tighter financing conditions, fiscal slippages, and greater economic and policy uncertainty. Importantly, countries are increasingly vulnerable to global factors affecting their borrowing costs, including cross-border effects of increased policy uncertainty in systemically important countries such as the United States.
Significant unidentified debt is another reason why public debt may turn out to be considerably higher than expected. An analysis of more than 30 countries found that 40% of unidentified debt comes from contingent liabilities and fiscal risks faced by governments, most of which relate to state-owned enterprise losses. Historically, unidentified debt has been large – ranging from 1% to 1.5% of GDP on average – and increases sharply during periods of financial stress.
Greater fiscal consolidation
If public debt is higher than it appears, the current fiscal effort is probably less than necessary.
Fiscal consolidation is crucial to contain debt risks. Now that inflation is moderating and central banks are lowering their policy interest rates, economies are better able to absorb the economic effects of fiscal policy tightening. Delaying this adjustment would be costly and also risky, as the necessary correction increases over time. Moreover, experience shows that high debt and the absence of credible fiscal plans can trigger adverse market reactions, limiting room for manoeuvre in the event of turbulence.
The IMF’s analysis, which takes into account country-specific risks to the debt outlook, indicates that the fiscal adjustments currently underway—averaging 1 percent of GDP over six years to 2029—would not be sufficient, even if fully implemented, to provide a high probability of significant debt reduction or stabilization. For an average economy to have a high probability of debt stabilization, a cumulative tightening of about 3.8 percent of GDP over the same period would be required. In countries where debt stabilization is not expected, such as China and the United States, the effort required is substantially greater. However, these two economies have many more monetary policy options available to them than other countries.
Focus on people
According to the IMF's analysis, large fiscal adjustments, if not well calibrated, will lead to considerable output losses as a result of falling aggregate demand, and may harm vulnerable groups and lead to increased inequality. Therefore, in order to mitigate the costs of consolidation and to gain public support for the necessary fiscal adjustment, it must be carefully designed.
The choice of fiscal measures is important because their effects are not the same for all and also involve trade-offs. For example, cuts in public investment cause the largest output losses and deteriorate long-term growth prospects, while reducing social transfers harms vulnerable households and increases inequality.
For the fund, the right mix of people-centred and growth-focused measures is needed, which will vary from country to country. "Advanced economies should push for reforms to social entitlement programmes, reorganise spending priorities and increase tax revenue where the tax burden is low. Emerging market and developing economies have greater potential to mobilise tax revenue – by broadening tax bases and improving the capacity to manage public revenues – while strengthening social safety nets and safeguarding public investment to promote long-term growth," it says.
Speed also matters. IMF analysis suggests that a measured and sustained pace of adjustment would reduce fiscal risks and limit the negative impact on output and inequality, which would be about 40% smaller than that caused by a more abrupt tightening. However, some countries at high risk of debt distress will need concentrated fiscal consolidation in the initial phase.
Adjustments should be accompanied by stronger fiscal governance, including credible medium-term frameworks, independent fiscal councils, and robust risk management. Improving the assessment of fiscal risks, closely monitoring contingent liabilities in state-owned enterprises, and publishing granular and timely debt statistics can reduce unidentified debt.
The high level of public debt is a cause for concern. The IMF argues that risks are high even in some countries where public debt levels appear manageable, and that actual debt data in the coming years may be worse than expected. Current adjustment plans are not sufficient to stabilize or reduce debt with confidence. The report also highlights that well-designed fiscal adjustment can help reduce debt risks, improve public debt prospects, and mitigate adverse social effects.
