## STABILIZING DEBT IN ADVANCED ECONOMIES

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**Canonical URL:** [STABILIZING DEBT IN ADVANCED ECONOMIES](https://www.imf.org/-/media/files/publications/fandd/article/2026/03/darvas.pdf)

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### Overview
- Many highly indebted advanced economies face a grim fiscal outlook: under current policies, public debt ratios of countries including Belgium, France, the United Kingdom, and the United States are set to deteriorate over the next two decades.
- Financial markets have been forgiving so far, but recent tremors suggest rising sensitivity to negative fiscal or economic news, which could lead markets to demand higher interest rates even for highly liquid government bond markets.
- AI-driven productivity growth may slow the increase in debt ratios and reduce the needed adjustment, but the magnitude and timing of this effect are unclear. Population aging and growth declines linked to trade fragmentation and political uncertainty work in the opposite direction.

### Methodology used in the analysis
- Horizon: 20-year horizon starting in 2024, divided into two periods:
  - First period: seven-year period in which governments raise the primary balance to a level that ensures debt sustainability.
  - Second period: 13-year period in which governments keep the primary balance constant, excluding spending changes driven by an aging society.
- Objective: ensure a 70 percent probability that the fiscal adjustment in the first period is large enough to stabilize the debt ratio over the final five years of the 20-year horizon.
- Inputs: official growth forecasts and market-based projections for interest rates, exchange rates, and inflation, combined with simulated shocks to generate probability distributions for future debt ratios under different primary-balance scenarios.
- Primary balance defined as the fiscal balance excluding interest payments on the debt.

### Key quantitative findings
- Required long-term primary balances to stabilize debt (examples):
  - France: 1.3 percent of GDP
  - United States: 1.3 percent of GDP
  - Belgium: 1.8 percent of GDP
  - United Kingdom: 1.8 percent of GDP
  - Italy: 2.5 percent of GDP
- Current deficits in 2024 imply substantial adjustments are likely:
  - About a dozen countries require adjustments of more than 3 percent of GDP.
  - Five countries—France, Poland, Romania, the Slovak Republic, and the US—need adjustments of 5 percent relative to 2024.
- Debt ratios and related figures:
  - Ireland’s debt ratio: 39 percent of GDP
  - United States’ debt ratio: 122 percent of GDP
  - United Kingdom’s debt ratio: 101 percent of GDP
  - Italy’s debt ratio: roughly 135 percent of GDP
- Examples of smaller required adjustments or strong outcomes:
  - Portugal needs an adjustment of 0.5 percent of GDP.
  - Ireland’s required adjustment: 1.9 percent of GDP.
  - Greece posted a primary balance of 4.0 percent (adjusted for swings in the business cycle) in 2024.
- Growth performance (post-crisis examples):
  - Greece, Portugal, and Ireland recorded average annual growth between 3.1 percent and 4.2 percent in 2022–25.
  - United States growth pace: 2.6 percent (2022–25 average mentioned for comparison).

### Historical precedents and feasibility
- Primary balances at the levels needed to stabilize debt in several high-debt advanced economies—and the large adjustments needed to get there from current fiscal positions—are rare historically.
  - Example: France would need a primary surplus of 1.3 percent of GDP to stabilize its debt; this level has happened only six times in five decades.
- Historical episode: After the 2008 global financial crisis, countries that faced severe fiscal crises accepted EU/IMF lending programs; the programs’ fiscal tightening and structural reforms—despite design flaws—helped return these economies to sustainable growth, though the adjustment was painful and in some cases very long-lasting.

### Policy scenarios and recommendations
- Best outcome scenario:
  - Combine growth-enhancing reform (including implementing the Draghi report’s single-market agenda in the EU) with deep reforms to social security and pension systems.
  - Overhaul tax systems to raise revenue without discouraging growth; noted as especially relevant for the US, the only OECD country without a value-added tax.
- More likely moderate scenario:
  - Shift in domestic political leadership prioritizing fiscal discipline without necessarily implementing deep structural reform (Italy cited as an example where broad budget control was achieved across political spectrum).
- Hard-landing scenario:
  - A sudden spike in borrowing costs could trigger debt distress; as debt rises, interest rates could climb, and markets might become more sensitive to adverse fiscal-sustainability news.
  - Possible government responses include forms of financial repression (for example, encouraging domestic banks or institutions to absorb additional government debt), but such measures have limits.
  - Surprise inflation could temporarily ease fiscal pressures, but persistently higher inflation would eventually drive up nominal interest rates.

### Risks and conclusion
- Many countries plan adjustments to stabilize debt ratios, but several use macroeconomic assumptions more optimistic than common expert forecasts (example: Germany’s plan assumes higher inflation and growth than expert forecasts). If actual growth and inflation are lower, deficits and debt will be higher than projected.
- Forecasts by the European Commission and the IMF suggest that countries with the biggest adjustment needs are unlikely to deliver the measures needed to stabilize their debt levels, reinforcing doubts about the likelihood of planned adjustments.
- The central lesson: fiscal discipline and structural reforms—along with public and private debt restructuring when debt is unsustainable—pay off eventually, but political resistance means market pressure often forces such adjustments.

*Zsolt Darvas and Jeromin Zettelmeyer*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/03/darvas.pdf_