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### Overview
- Global public debt levels are elevated and expected to exceed $100 trillion in 2024.
- After a decline in 2021−22, global public debt edged up again in 2023 and is projected to approach 100 percent of GDP by 2030.
- Although debt is projected to stabilize or decline by 2029 in about two-thirds of countries, public debt generally remains higher than before the pandemic.

### Distribution of risks around baseline public debt projections
- Debt projections exhibit an optimism bias: realized debt-to-GDP ratios three years ahead are higher than projected by 6 percentage points of GDP, on average.
- A novel unified “debt-at-risk” framework estimates the conditional distribution of future debt-to-GDP ratios using panel quantile regressions on a sample of 74 countries accounting for more than 90 percent of global government debt.
- Key debt-at-risk estimates:
  - Global debt-at-risk (95th quantile) is estimated at 115 percent of GDP three years ahead, about 20 percentage points of GDP higher than current World Economic Outlook projections.
  - Global debt-at-risk is 119 percent of GDP five years ahead, about 20 percentage points higher than currently projected for 2028.
  - The distribution is right skewed; the 75th percentile is 7 percentage points higher than the baseline, reaching 103 percent of GDP three years ahead.
- Unidentified debt has historically averaged around 1.0−1.5 percent of GDP per year and can rise up to 7 percentage points of GDP in the wake of financial system stress.

### Key drivers of debt risks (empirical findings)
- Financial, political, and economic conditions predict debt risks; impacts vary by horizon and across quantiles.
  - Tighter financial conditions disproportionately increase the right tail of the future debt distribution, with strongest effects over a three-year horizon (example: Spain 2011 associated with ~3 percentage points of GDP increase in debt-at-risk after three years).
  - Increases in sovereign spreads significantly predict upside debt risks in the near term (example: Sri Lanka 2022 associated with ~2 percentage points of GDP increase in debt-at-risk after three years).
  - Economic and policy uncertainty and social unrest raise debt risks in the near term.
- Economic factors have persistent and asymmetric effects:
  - Higher initial debt levels and primary balances have long-lasting and asymmetric effects on the right tail of future debt.
  - Higher primary balances reduce debt across all quantiles.
  - Higher inflation reduces debt-at-risk in both the short and medium term.
- Heterogeneity across country groups:
  - Three-year-ahead debt-at-risk: about 134 percent of GDP for advanced economies and 88 percent for emerging market and developing economies.
  - For the United States, three-year-ahead debt-at-risk is estimated to exceed 150 percent of GDP, about 20 percentage points higher than the baseline October 2024 WEO projection.
  - Financial conditions, social unrest, and world uncertainty have larger medium-term effects on debt-at-risk in emerging market and developing economies than in advanced economies.
- Interaction with initial debt:
  - When initial debt is above 70 percent of GDP, an increase in growth of 1 percentage point decreases debt-at-risk three years ahead by about 1.3 percentage points of GDP; when initial debt is lower than that threshold, the effect is about 0.5 percentage point of GDP and less precisely estimated.

### Fluctuations in sovereign yields and global factors
- Global factors explain a large share of sovereign yield fluctuations:
  - More than 50 percent of fluctuations over the past two decades in sovereign bond yields for advanced economies and foreign-currency-denominated bond yields for emerging market and developing economies.
  - More than 30 percent of fluctuations in local-currency-denominated bond yields in emerging market and developing economies, on average.
- The role of global factors increased during the pandemic and the recent spike in global inflation.
- Volatility of global sovereign yields correlates highly with:
  - Volatility of US sovereign yields
  - Uncertainty surrounding US fiscal and monetary policy
  - Geopolitical risks (to a lesser extent)
- Countries with larger shares of foreign and nonbank investors see a higher contribution of global factors to sovereign yield fluctuations (example: contribution increases by 15 percent for advanced economies when the share of nonbank investors increases from the 25th to the 75th percentile).
- Higher interest burdens as a share of tax revenues are associated with greater exposure of local-currency-denominated sovereign yields to global factors.
- Policy implication: reducing fiscal-policy uncertainty and implementing sound public debt management can mitigate adverse fluctuations and spillovers.

### Unidentified debt: composition, scale, and crisis dynamics
- Unidentified debt is an important source of risk and is historically high in emerging market and developing economies: about 1–1.5 percent of GDP per year on average.
- Narrative classification (17 emerging market and developing economies, 2000–23) identifies six sources:
  - Contingent liabilities and fiscal risks
  - Arrears
  - Extrabudgetary spending
  - Institutional changes (changes in debt perimeters)
  - Unaccounted debt
  - Statistical discrepancies
- Composition of identified components (2010–23):
  - Materialization of contingent liabilities and fiscal risks: 38 percent of total identified components
    - Within that: SOE-related 51%, Loan guarantees 14%, Bank recapitalization 16%, Natural disasters 7%, Legal claims against the state 8%, Other 4%.
  - Arrears: 25 percent.
  - Institutional changes: 20 percent.
  - Debt unaccounted for (including statistical discrepancy): 11 percent.
  - Extrabudgetary spending: 6 percent.
- Financial stress and banking crises:
  - Banking crises lead to materializations of unidentified debt of 7 percent of GDP in the crisis year and another 2 percent of GDP in the following year.
  - Increases in financial stress are associated with an increase in unidentified debt of 2½ percent of GDP after one year.
- Countries with weak fiscal governance can see banking crises associated with statistically significant and sizable increases of 10–15 percentage points of GDP in unidentified debt.

### Fiscal policy to get debt under control: required adjustments and design
- Current fiscal adjustment plans fall short of what is needed to stabilize or reduce debt with high probability for many countries.
- Stochastic sovereign-risk methodology quantifies the “proactive” fiscal adjustment needed.
- Probability and adjustment size:
  - A cumulative fiscal adjustment of 1 percent of GDP over the next five years implies a 60 percent probability that a country’s debt will stabilize or decrease by 2029.
  - Increasing this probability to 80 percent for a median country requires a cumulative adjustment of 3−3½ percent of GDP over the medium term.
  - Keeping debt-to-GDP ratios from rising, with an 80 percent probability of success, entails a fiscal adjustment significantly higher than historical median achievement (2½ percent of GDP) or most current plans.
  - Countries whose debt the WEO baseline does not project will stabilize account for nearly 60 percent of global debt; stabilizing debt in these countries with high probability requires an adjustment of 4½ percent of GDP over the medium term.
  - Delaying fiscal adjustment is costly: requires an additional adjustment of about 0.2 percentage point of GDP per year.
  - The median adjustment for countries where debt is projected to stabilize or decline is 3.6 percentage points of GDP.
  - WEO baseline median cumulative fiscal adjustment is about 1 percentage point of GDP cumulative over six years (2023–29).
- Global average requirement:
  - Cumulative adjustments needed on average over the medium term to stabilize (or reduce) debt at high probability: 3.0–4.5 percent of GDP.
  - This represents about 20 percent of total revenues in low-income developing countries and about 13 percent of total revenues in other economies.

### Designing adjustments to limit output and inequality costs
- Design principles:
  - Combine both expenditure and revenue measures to mitigate adverse impacts on output and inequality.
  - Be gradual and sustained to balance fiscal risks and the strength of private demand.
  - Tailor measures to country circumstances; safeguard public investment where it raises growth, protect vulnerable households through targeted transfers, and phase out untargeted subsidies.
  - Strengthen fiscal governance—greater budget transparency and compliance with fiscal rules—to reduce unidentified debt materialization during financial stress.
- Pace and composition:
  - Gradual six-year adjustments produce smaller contractions in output and smaller increases in consumption inequality than the same-sized adjustment implemented in three years.
  - Fast-track (three-year) adjustments raise output contraction and consumption inequality and may be politically unfeasible except when market access is lost or acute funding pressures exist.
  - Credible adjustments can lower funding costs and increase financial stability (not directly captured in model estimates).

### Heterogeneous Agent New Keynesian (HANK) model findings and illustrative packages
- Model setup:
  - Calibrated to representative advanced economy (United States) and representative emerging market economy (Peru).
  - Fiscal instruments: government consumption, public investment, subsidies, transfers (targeted and untargeted), progressive income taxes.
  - Simulation: temporary one-off fiscal adjustment of 1 percentage point of steady-state output for each measure; illustrative adjustment of cumulative 3 percent of GDP over six years (about 0.5 percent of GDP annually).
- Transmission channels:
  - Disposable-income channel is primary; interest-rate and asset-valuation channels matter more for high-income households.
  - Financial frictions raise marginal propensities to consume for low- and middle-income households, amplifying aggregate effects.
- Comparative results:
  - Calibrated model shows a reduction in the debt-to-GDP ratio of about 4 percentage points by the end of the adjustment period in both scenarios.
  - Two packages compared:
    1. Undesirable: relies on cuts in public investment and retains most untargeted subsidies.
    2. Preferred: combines revenue and expenditure measures, safeguards public investment, protects vulnerable households with targeted transfers, phases out untargeted subsidies.
  - Aggregate impacts:
    - Preferred adjustment: output drops about 0.8 percent of steady-state GDP.
    - Undesirable package: output drops about 1.3–1.6 percent of steady-state GDP.
    - Consumption among the bottom 50th percentile is reduced by an average of 0.7–0.8 percentage point in the preferred package—about half the reduction under the undesirable package.
    - Preferred package mitigates adverse impacts on consumption inequality: decline in consumption broadly similar across household income groups; undesirable package hits low- and middle-income groups much more.
  - Emerging market vs advanced economy:
    - For the same undesirable package, adverse impacts on output and inequality are larger in an emerging market economy than in an advanced economy.
    - Implication: emerging markets should emphasize safeguarding public investment and targeted transfers and pursue revenue mobilization to reduce reliance on expenditure cuts.

### Country-specific options and revenue mobilization
- Address budget rigidities to reallocate expenditure (examples: Brazil, India, South Africa).
- Phase out untargeted energy subsidies to limit government consumption cuts where subsidies disproportionately benefit higher-income households (examples where phasing out recommended: Saudi Arabia, Thailand; cases where subsidies retained: Republic of Congo, Togo).
- Revenue measures for emerging markets:
  - Assess VAT and personal income tax rates and thresholds (example: Mexico).
  - Increase VAT rates where feasible (examples: Nigeria, Thailand).
  - Reintroduce goods and services taxes (example: Malaysia).
  - Rationalize tax expenditures or exemptions (examples: Brazil, Egypt, Kyrgyz Republic).
- Advanced-economy guidance where tax burdens are already high (example: France):
  - Rely more on reprioritizing expenditures via broad-based expenditure reviews.
  - Entitlement reform is key given large and rigid budget shares.
- In countries with scope to raise revenues (examples: United Kingdom, United States):
  - Stabilizing or reducing debt may require both spending and revenue measures: raise indirect taxes, progressively increase income taxes, remove tax exemptions, and improve tax-expenditure efficiency.

### Tackling unidentified debt: institutional and governance measures
- Assess and monitor contingent liabilities, including state-owned enterprises; adopt timely reporting and stress-testing.
- Broaden institutional coverage of the budget and debt statistics to reflect all borrowing (including local governments and publicly guaranteed entities); prepare public sector balance sheets.
- Strengthen expenditure control functions, move toward cash management, track and audit arrears, and set arrears clearance strategies.
- Improve fiscal transparency: provide timely budget information, open access to key documents, engage the public, and strengthen independent fiscal oversight.
- Strengthen bank supervision, resolution tools, and stress-testing to limit public-finance fallout from banking-sector recapitalizations.
- Fiscal rules with broad coverage can limit hiding of debt but must be well designed to avoid incentives to circumvent them.

### For countries in debt distress and structural complementarities
- Timely and adequate debt restructuring is needed alongside fiscal adjustments to restore debt sustainability.
- Recent IMF reforms to debt and lending frameworks, creditor committee efforts, and the Global Sovereign Debt Roundtable have helped streamline restructuring; further strengthening is crucial.
- Coordinated efforts are necessary to ensure concessional financing to support low-income developing countries and avoid undue fiscal tightening.
- Complementary structural reforms—business deregulation, enhancing social protection, reducing labor and product market distortions, and lowering barriers to trade—should accompany fiscal adjustments to support long-term growth, increase revenues, and lower borrowing costs.

### Summary and implications
- Global public debt is set to rise over the medium term; planned fiscal adjustments are uncertain and debt levels are higher than before the pandemic.
- Risks surrounding debt projections are elevated and highly tilted to the upside.
- Debt-at-risk dynamics: debt levels today amplify negative effects of weaker growth or tighter financial conditions on future debt ratios.
- For emerging market and developing economies, high debt levels combined with sizable gross financing needs raise the probability of sovereign distress—more than two-thirds of these economies are already in or at high risk of debt distress.
- Policy priorities:
  - Strengthen fiscal plans to deliver cumulative adjustments in the range of 3.0–4.5 percent of GDP on average where needed.
  - Design adjustments that combine expenditure and revenue measures to limit adverse effects on output and inequality.
  - Enhance fiscal governance—improve budget transparency and adherence to fiscal rules—to reduce unidentified debt and fiscal slippages.
  - Monitor and prepare for global spillovers from elevated debt and fiscal uncertainty in systemically important economies.
  - Tailor timing and composition: gradual but sustained adjustments for most countries; front-loaded adjustments where sovereign distress or acute market pressures exist.

*Source: CHAPTER 1 PuTTINg A LId ON PubLIC debT (ch1 - CHAPTER 1 PuTTINg A LId ON PubLIC debT).*

### Introduction

### ch1 - Introduction

### Overview
- Global public debt levels are elevated and expected to exceed $100 trillion in 2024.
- After a decline in 2021−22, global public debt edged up again in 2023 and is projected to approach 100 percent of GDP by 2030.
- Although debt is projected to stabilize or decline by 2029 in about two-thirds of countries, public debt generally remains higher than before the pandemic.

### Distribution of risks around baseline public debt projections
- Debt projections exhibit an optimism bias: realized debt-to-GDP ratios three years ahead are higher than projected by 6 percentage points of GDP, on average.
- A novel unified “debt-at-risk” framework is used to assess risks around baseline debt projections by estimating the conditional distribution of future debt-to-GDP ratios (panel quantile regressions on a sample of 74 countries accounting for more than 90 percent of global government debt).
- Global debt-at-risk (95th quantile) is estimated at 115 percent of GDP three years ahead, about 20 percentage points of GDP higher than current World Economic Outlook projections.
- Global debt-at-risk is 119 percent of GDP five years ahead, about 20 percentage points higher than currently projected for 2028.
- The global debt distribution is right skewed; risks at the 75th percentile are sizable—7 percentage points higher than the baseline projection, reaching 103 percent of GDP three years ahead.
- Unidentified debt has historically averaged around 1.0−1.5 percent of GDP per year and can rise up to 7 percentage points of GDP in the wake of financial system stress.

### Key drivers of debt risks (empirical findings)
- Financial, political, and economic conditions predict debt risks, with impacts varying by time horizon and across quantiles of the debt distribution.
  - Tighter financial conditions disproportionately increase the right tail of the future debt distribution, with strongest effects over a three-year horizon (example: Spain 2011 associated with ~3 percentage points of GDP increase in debt-at-risk after three years).
  - Increases in sovereign spreads significantly predict upside debt risks in the near term (example: Sri Lanka 2022 associated with ~2 percentage points of GDP increase in debt-at-risk after three years).
  - Economic and policy uncertainty and social unrest raise debt risks in the near term.
- Economic factors have persistent and asymmetric effects:
  - Higher initial debt levels and primary balances have long-lasting and asymmetric effects on the right tail of future debt.
  - Higher primary balances reduce debt across all quantiles.
  - Higher inflation reduces debt-at-risk in both the short and medium term.
- Heterogeneity across country groups:
  - Three-year-ahead debt-at-risk is estimated at about 134 percent of GDP for advanced economies and 88 percent for emerging market and developing economies.
  - For the United States (a systemically important advanced economy), three-year-ahead debt-at-risk is estimated to exceed 150 percent of GDP, about 20 percentage points higher than the baseline October 2024 World Economic Outlook projection.
  - Financial conditions, social unrest, and world uncertainty have larger medium-term effects on debt-at-risk in emerging market and developing economies than in advanced economies.
- Interaction with initial debt:
  - When initial debt is above 70 percent of GDP, an increase in growth of 1 percentage point decreases debt-at-risk three years ahead by about 1.3 percentage points of GDP; when initial debt is lower than that threshold, the effect is about 0.5 percentage point of GDP and less precisely estimated.

### Fiscal policy to get debt under control (required adjustments and design)
- Current fiscal adjustment plans fall short of what is needed to stabilize or reduce debt with high probability for many countries.
- Cumulative adjustments needed on average over the medium term to stabilize (or reduce) debt at high probability: 3.0–4.5 percent of GDP.
- A well-designed adjustment should:
  - Combine both expenditure and revenue measures to mitigate adverse impacts on output and inequality.
  - Be gradual and sustained to balance fiscal risks and the strength of private demand.
  - Be tailored to country circumstances; in countries with benign debt outlooks, prioritize optimizing fiscal space while maintaining debt sustainability.
- Strengthening fiscal governance—greater budget transparency and compliance with fiscal rules—significantly mitigates the manifestation of unidentified debt during periods of financial stress.

### Fiscal risks not fully captured by model-estimated debt-at-risk
- Model-estimated debt-at-risk does not fully reflect mounting spending pressures such as the green transition, aging-related entitlements, defense, and energy security—factors that could exacerbate upside debt risks.
  - Achieving net zero emissions by midcentury is expected to increase government debt by 10–15 percentage points of GDP relative to the baseline.
  - Governments in emerging market economies and low-income developing countries need investments on the order of 3 and 11 percent of GDP per year, respectively, to close development gaps and meet the UN Sustainable Development Goals.

### Policy implications and priorities
- Given high current debt and significant upside risks, policymakers should:
  - Strengthen fiscal plans to deliver cumulative adjustments in the range of 3.0–4.5 percent of GDP on average where needed.
  - Design adjustments that combine expenditure and revenue measures to limit adverse effects on output and inequality.
  - Enhance fiscal governance—improving budget transparency and adherence to fiscal rules—to reduce unidentified debt and fiscal slippages.
  - Monitor and prepare for global spillovers from elevated debt and fiscal uncertainty in systemically important economies.

*Source: IMF Fiscal Monitor, Chapter 1 — Putting a Lid on Public Debt (Introduction).*

### CHAPTER 1 PuTTINg A LId ON PubLIC debT

### CHAPTER 1 PuTTINg A LId ON PubLIC debT

### Fluctuations in Sovereign Yields and the Role of Global Factors
- Sovereign yields show notable and growing co-movement across countries; tight interquartile ranges for sovereign yields are highlighted (Figure 1.9).
- Empirical evidence from a dynamic factor model with time-varying parameters and stochastic volatility indicates global factors:
  - Explain more than 50 percent of fluctuations over the past two decades in sovereign bond yields for advanced economies and foreign-currency-denominated bond yields for emerging market and developing economies.
  - Explain more than 30 percent of fluctuations in local-currency-denominated bond yields in emerging market and developing economies, on average (Figure 1.10).
- The role of global factors has increased over time, notably during the pandemic and the recent spike in global inflation.
- Volatility of global sovereign yields correlates highly with measures of global and US financial volatility, including:
  - Volatility of US sovereign yields
  - Uncertainty surrounding US fiscal and monetary policy
  - Geopolitical risks (to a lesser extent) (Figure 1.11)
- Heterogeneity in the contribution of global factors across countries:
  - Global factors are more relevant in countries with larger shares of foreign and nonbank investors (Figure 1.12).
  - Example: Fluctuations in sovereign yields explained by global factors increase by 15 percent for advanced economies if the share of nonbank investors increases from the 25th to the 75th percentile.
  - Higher interest burdens as a share of tax revenues are associated with greater exposure of local-currency-denominated sovereign yields to global factors.
- Policy implication:
  - Reducing uncertainty surrounding fiscal policy and implementing sound public debt management can mitigate adverse fluctuations in sovereign yields and spillovers driven by global factors.

*Key referenced evidence and notes: model estimated for 45 advanced economies and emerging market and developing economies; pairwise correlations and regression estimates reported in Figures 1.9–1.12 and Online Annex 1.2.*

### Unidentified Debt
- Unidentified debt is an important source of risk to the debt outlook.
  - Historically high in emerging market and developing economies: about 1–1.5 percent of GDP per year on average (Figure 1.13).
- Narrative analysis of IMF Country Reports for 17 emerging market and developing economies (2000–23) classifies sources of unidentified debt into six categories:
  - Contingent liabilities and fiscal risks
  - Arrears
  - Extrabudgetary spending
  - Institutional changes (changes in debt perimeters)
  - Unaccounted debt
  - Statistical discrepancies
- Composition of identified components (2010–23):
  - Materialization of contingent liabilities and fiscal risks: 38 percent of total identified components (Figure 1.14).
    - Within that category: SOE-related (51%), Loan guarantees (14%), Bank recapitalization (16%), Natural disasters (7%), Legal claims against the state (8%), Other (4%).
  - Arrears: 25 percent.
  - Institutional changes: 20 percent.
  - Debt unaccounted for (including statistical discrepancy): 11 percent.
  - Extrabudgetary spending: 6 percent.
- Cross-country heterogeneity:
  - Examples: Honduras—arrears from state-owned electricity company losses and extrabudgetary trust fund spending (until 2022); Mozambique—weak governance and debt management.
- Unidentified debt and financial stress:
  - Banking crises lead to large materializations of unidentified debt: 7 percent of GDP in the crisis year and another 2 percent of GDP in the following year (Figure 1.16).
  - Increases in financial stress are associated with an increase in unidentified debt of 2½ percent of GDP after one year.
- Interpretation:
  - Large effects are consistent with materialization during crises, largely through bank recapitalization, calling of loan guarantees, and recognition of losses in state-owned enterprises.

### Fiscal Policy to Get Debt Under Control
- Fiscal policy faces trade-offs among macroeconomic stabilization, debt sustainability, distributional concerns, and long-term growth.
- The appropriate balance depends on:
  - Level and composition of public debt (maturity, creditor composition)
  - Gross financing needs
  - Economic growth path (Online Annex 1.4; Bianchi and others 2024)
- Recent deterioration in many debt-vulnerability indicators and upside risks to debt projections imply many countries should orient fiscal policy toward rebuilding fiscal buffers and containing debt vulnerabilities (Figure 1.17).
- Historical note:
  - Financial repression has contributed to debt reduction historically, but it is neither viable nor desirable in globally integrated capital markets.
- Guidance on fiscal adjustments:
  - Fiscal adjustments must be decisive, deliberate, and well designed.
    - Decisive: many countries have depleted fiscal buffers and some may need large adjustments; delaying increases costs and risks.
    - Deliberate: plans needed to balance trade-offs and garner public support because adjustments often lead to near-term declines in output and employment.
    - Well designed: to avoid prolonged anemic growth that entrenches poverty and inequality; composition matters for social acceptability and long-term outcomes.
- This chapter focuses fiscal-policy analysis on three dimensions:
  - Quantifying the size of fiscal adjustments needed for a high probability of stabilizing or reducing debt.
  - Designing fiscal adjustments to mitigate adverse impacts on output and inequality.
  - Policies to limit materialization of unidentified debt, especially during financial stress.

### Size of Fiscal Adjustment Needed to Contain Debt Vulnerabilities
- Large primary deficits are key drivers of global debt-at-risk; fiscal adjustments reduce both debt levels and debt risks by raising the likelihood that debt will stabilize.
- The required size of adjustment depends on initial debt levels and the probability that debt can be stabilized under uncertainty and upside risks.
- Methodology:
  - A stochastic approach based on the IMF’s Sovereign Risk and Debt Sustainability Framework is used to quantify the size of the “proactive” fiscal adjustment—measured in terms of an improvement (see Online Annex 1.4).

*Source: CHAPTER 1 PuTTINg A LId ON PubLIC debT, International Monetary Fund | October 2024.*

### 1. Primary Balance

### ch1 - 1. Primary Balance

### Probability of Debt Stabilization and Required Fiscal Adjustments
- A cumulative fiscal adjustment of 1 percent of GDP over the next five years implies a 60 percent probability that a country’s debt will stabilize or decrease by 2029.
- Increasing this probability to 80 percent for a median country requires a cumulative adjustment of 3−3½ percent of GDP over the medium term.
- A country’s probability of keeping debt from rising is calculated as the number of debt paths for which the baseline primary balance is higher than or equal to the debt-stabilizing primary balance as a percent of the total number of debt paths.
- Historical and planned comparisons:
  - Keeping debt-to-GDP ratios from rising, with an 80 percent probability of success, entails a fiscal adjustment significantly higher than what most countries have achieved in the past (2½ percent of GDP) or what most are currently planning.
  - Countries that are delaying fiscal adjustment—and whose debt the WEO baseline does not project will stabilize—account for nearly 60 percent of global debt.
  - Having a high probability of stabilizing debt in these countries requires an adjustment of 4½ percent of GDP over the medium term.
  - Delaying fiscal adjustment is costly, requiring an additional adjustment of about 0.2 percentage point of GDP per year.
  - The median adjustment for countries where debt is projected to stabilize or decline is 3.6 percentage points of GDP.
- WEO baseline context:
  - The cumulative median fiscal adjustment in the World Economic Outlook (WEO) is about 1 percentage point of GDP cumulative over six years (2023–29).
  - Additional fiscal adjustments in the analysis are the same for all countries and are applied to those countries’ baseline projections.

### Design of Fiscal Adjustments: Trade-offs and Objectives
- Fiscal adjustments involve output-inequality trade-offs; key objective is to mitigate negative impacts on output and inequality.
- Design must be calibrated to account for:
  - Policy mix (time, pace, composition).
  - Heterogeneous impacts across households by income (consumption) and wealth distribution.
- Important design principles highlighted:
  - Safeguard public investment where it has large positive effects on output.
  - Protect vulnerable households through targeted transfers.
  - Phase out untargeted subsidies.
  - Combine revenue mobilization with expenditure measures where feasible.

### Heterogeneous Agent New Keynesian (HANK) Model Framework and Channels
- The HANK model incorporates household income and wealth characteristics to show how fiscal measures affect output and inequality.
- Model calibrated to a representative advanced economy (United States) and a representative emerging market economy (Peru).
- Fiscal instruments considered: government consumption, public investment, subsidies, transfers (targeted and untargeted), progressive income taxes.
- Transmission channels:
  - Disposable-income channel (wages and transfers) is the primary pathway by which fiscal adjustments affect consumption and output.
  - Interest-rate and asset-valuation channels matter more for high-income households with asset holdings.
  - Financial frictions (limited liquidity access) raise marginal propensities to consume for low- and middle-income households, amplifying aggregate effects.
- Country differences:
  - Emerging market and developing economies have more limited household insurance and greater exposure to income shocks, increasing vulnerability to spending cuts.
  - Energy subsidies are regressive in emerging market and developing economies (benefit richer households disproportionately) but benefit middle-income households in advanced economies.

### Model Findings: Impacts of Different Fiscal Measures
- Expenditure and revenue measures affect households and aggregate economy differently:
  - Cuts in transfers directly reduce household consumption—especially targeted transfers to low-income households.
  - Reductions in government consumption have a sizable output impact by lowering aggregate demand.
  - Public investment cuts have an even larger negative impact on output because they hamper production and aggregate supply.
  - Progressive tax increases lead to smaller output losses than cuts in government transfers because high-income households reduce consumption by less due to larger asset holdings.
- Relative magnitudes and simulation setup:
  - Simulation results based on a temporary one-off fiscal adjustment of 1 percentage point of steady-state output for each measure (for representative advanced and emerging market economies).
  - Transfers separated into “Untargeted” (for all households) and “Targeted” (to low-income households: 5th percentile and below).
  - Income tax assumed progressive; energy subsidies calibrated based on energy consumption across households.

### Illustrative Fiscal Adjustment Packages and Quantitative Outcomes
- Adjustment size for comparison: cumulative 3 percent of GDP over six years (about 0.5 percent of GDP annually).
- Debt impact:
  - The calibrated model shows a reduction in the debt-to-GDP ratio of about 4 percentage points by the end of the adjustment period in both scenarios.
- Two packages compared:
  1. Undesirable adjustment: relies on cuts in public investment and retains most untargeted subsidies.
  2. Preferred adjustment: combines revenue and expenditure measures, safeguards public investment, protects vulnerable households through targeted transfers, and phases out untargeted subsidies.
- Aggregate output and consumption effects:
  - Preferred adjustment: output drops about 0.8 percent of steady-state GDP.
  - Undesirable package: output drops about 1.3–1.6 percent of steady-state GDP.
  - Consumption among the bottom 50th percentile is reduced by an average of 0.7–0.8 percentage point in the preferred package—about half the reduction under the undesirable package.
  - Preferred package mitigates adverse impacts on consumption inequality: decline in consumption is broadly the same across household income groups in the preferred package, whereas the undesirable package hits low- and middle-income groups much more than high-income households.
- Differences across country types:
  - For the same undesirable package, adverse impacts on output and inequality are larger in an emerging market economy than in an advanced economy, reflecting a larger fraction of households with high marginal propensities to consume and limited insurance mechanisms.
  - Implication: emerging markets should emphasize safeguarding public investment and targeted transfers and pursue revenue mobilization to reduce reliance on expenditure cuts.

### Country-Specific Considerations and Policy Options
- In some countries, addressing budget rigidities is necessary to reallocate expenditure (examples noted: Brazil, India, South Africa).
- Phasing out untargeted energy subsidies can limit cuts in government consumption, especially where subsidies benefit higher-income households (examples noted: Saudi Arabia, Thailand; cases where subsidies retained: Republic of Congo, Togo).
- Revenue mobilization recommendations for emerging markets:
  - Assess tax rates and thresholds comprehensively, notably VAT and personal income tax structures (example: Mexico).
  - Increase VAT rates where feasible (examples: Nigeria, Thailand).
  - Reintroduce goods and services taxes (example: Malaysia).
  - Rationalize tax expenditures or tax exemptions (examples: Brazil, Egypt, Kyrgyz Republic).
- Advanced-economy guidance where tax burdens are already high (example: France):
  - Rely more on reprioritizing expenditures through broad-based expenditure reviews.
  - Entitlement reform is key given large and rigid budget shares.
- In countries with scope to raise revenues (examples: United Kingdom, United States):
  - Stabilizing or reducing debt may require operating on both spending and revenue measures, including raising indirect taxes, progressively increasing income taxes, removing tax exemptions, and improving efficiency of tax expenditures.

*Source: IMF, World Economic Outlook database; material from the provided chapter content.*

### CHAPTER 1 PuTTINg A LId ON PubLIC debT

### CHAPTER 1 PuTTINg A LId ON PubLIC debT

### Fiscal adjustment: pace, size, and trade-offs
- Gradual but sustained fiscal adjustments are preferred: an adjustment implemented over six years produces smaller contractions in output and smaller increases in consumption inequality than the same-sized adjustment implemented aggressively in three years (reference: Online Annex 1.6).
- Fast-track adjustments (three years) can:
  - Lead output to contract and consumption inequality to increase more sharply.
  - Require politically unfeasible spending cuts and hikes in tax rates.
  - May be necessary for economies with acute funding pressures and lost market access, but require careful design to mitigate adverse impacts on output and inequality.
- Several countries that did not fully withdraw fiscal support after the 2022 energy price spikes should pursue up-front fiscal adjustments.
- Credible fiscal adjustments can lower funding costs and increase financial stability (not directly captured in the model-based analysis).
- Governments should calibrate adjustments to replenish fiscal buffers and generate policy space for long-standing structural challenges; political economy, informality, social protection strength, and labor market characteristics shape aggregate and distributional effects.

### Tackling unidentified debt: evidence and drivers
- Empirical evidence shows indicators of fiscal governance correlate negatively with unidentified debt (Figure 1.23): countries with stronger fiscal governance tend to have less unidentified debt on average.
- During banking crises, certain fiscal governance aspects—budget transparency and compliance with fiscal rules—significantly reduce unidentified debt (Figure 1.24).
- In countries with weaker fiscal governance, banking crises are associated with statistically significant and sizable increases of 10–15 percentage points of GDP in unidentified debt.
- The materialization of contingent liabilities and fiscal risks during banking crises is smaller in countries with strong fiscal governance.
- Arrears are identified as key sources of unidentified debt (reference: Figure 1.14).

### Policy priorities to contain unidentified debt and fiscal risks
- Assessing and managing contingent liabilities:
  - Enhance assessment and monitoring of contingent liabilities, including those associated with state-owned enterprises.
  - Example practices: Mozambique publishes consolidated accounts and incorporates fiscal risks from state-owned enterprises within its annual published reports.
  - Adopt risk mitigation policies such as timely and reliable reporting and stress-testing the financial viability of state-owned enterprises.
- Broadening institutional coverage:
  - Institute broad coverage of budget aggregates and expand institutional coverage of debt management to encompass the broader public sector.
  - Reflect all borrowing (including by local governments and public entities with public guarantees) in the budget process and in debt statistics.
  - Example practice: Mongolia has included the liabilities of its development bank in its public debt reporting since 2015.
  - Prepare public sector balance sheets covering assets and liabilities to assess debt risk.
  - Fiscal rules with broad coverage can limit hiding of debt.
- Strengthening core expenditure control functions and compliance with fiscal rules:
  - Improve budget credibility, apply effective controls to limit overspending, and move toward cash management to avoid accumulation of arrears.
  - Establish systems for tracking arrears, undertake regular audits to ensure validity of claimed arrears, and set arrears clearance strategies.
  - Example practice: Sierra Leone published a strategy in 2023 to clear past arrears verified by the national auditor, along with annual reports on arrears and reconciled interagency arrears.
  - Compliance with well-designed fiscal rules can keep expenditures within limits and avert persistent increases in unidentified debt after a crisis.
  - Note: The presence of fiscal rules alone is not sufficient; poorly designed rules may generate incentives to circumvent them.
- Increasing fiscal transparency:
  - Provide timely and quality budgetary information, open access to key budget documents, engage the public on fiscal issues, and strengthen independent fiscal oversight.
  - Analyze and report stock-flow adjustments in fiscal outturns to improve transparency and raise awareness about unidentified debt.
- Supportive mechanisms for contingent liabilities materializing from banking sector recapitalizations:
  - Strengthen bank supervision and regulation and establish resolution tools to minimize fallout on public finances.

### Summary, scale of needed adjustments, and country-specific guidance
- Global public debt is set to rise over the medium term; planned fiscal adjustments are uncertain and debt levels are higher than before the pandemic.
- Risks surrounding debt projections are elevated and highly tilted to the upside.
- Global debt-at-risk is estimated to be nearly 27
- Debt-at-risk dynamics: debt levels today amplify negative effects of weaker growth or tighter financial conditions on future debt ratios.
- For emerging market and developing economies, high debt levels combined with sizable gross financing needs can raise the probability of sovereign distress—more than two-thirds of these economies are already in or at high risk of debt distress (IMF 2024).
- Cumulative fiscal adjustment needed, on average, to stabilize (or reduce) debt with high probability: 3.0–4.5 percent of GDP over the medium term.
  - This required adjustment is higher than currently projected and higher by historical standards for many countries.
  - An adjustment of this magnitude represents about 20 percent of total revenues in low-income developing countries and about 13 percent of total revenues in other economies.
- Timing and design:
  - Now is an opportune time for many countries given major central banks pivoting to a less restrictive stance and economies better positioned to absorb effects of fiscal tightening.
  - Delaying adjustment would be costly and increase required correction; lack of credible plans can trigger adverse market reactions and reduce fiscal room during shocks.
  - Gradual but sustained adjustment can limit near-term impacts on output and inequality; however, countries with high risk of debt distress or acute market access pressures need more front-loaded adjustments.
- Tailoring adjustment packages:
  - Advanced economies:
    - Adjust expenditure priorities within overall expenditure cuts.
    - Focus on reforms to entitlements that take large and rigid budget shares.
    - Where taxes are relatively low, complement expenditure measures with revenue measures: raising indirect taxes, progressively increasing income taxes, removing tax exemptions, and rationalizing tax expenditures.
  - Emerging market and developing economies:
    - Rely more on revenue measures: increase indirect taxes, rationalize tax exemptions, broaden tax bases.
    - Frame measures within revenue mobilization strategies to upgrade tax systems and strengthen revenue administration capacity, including leveraging digital technology.
    - On expenditure side: rationalize government wage bills, reduce fragmentation of social safety nets, phase out costly fuel subsidies—preferably within comprehensive expenditure reviews—to free resources for public investment and transfers protecting vulnerable households.
- Institutional and governance anchors:
  - Governments need deliberate fiscal plans within credible and well-communicated medium-term fiscal frameworks to anchor adjustment paths and reduce fiscal policy uncertainty.
  - Strong independent fiscal oversight can reinforce government credibility and implementation of fiscal plans.
  - More granular, transparent, and timely disclosure regarding debt (creditor composition, instruments, exposures to risks, and government perimeter in debt reporting) is needed to allow granular assessment of fiscal risks and mitigate buildup of unidentified debt.

### For countries in debt distress
- Timely and adequate debt restructuring is needed alongside fiscal adjustments to restore debt sustainability.
- Recent IMF reforms to debt and lending frameworks, creditor committee efforts, and the Global Sovereign Debt Roundtable have helped streamline sovereign debt restructuring and shorten timelines; further strengthening of these processes is crucial.
- Greater coordinated efforts are necessary to ensure concessional financing to support low-income developing countries and avoid undue fiscal tightening.
- Complementary structural reforms (business deregulation, enhancing social protection systems, reducing labor and product market distortions, and lowering barriers to trade) should accompany fiscal adjustments to support long-term growth, increase fiscal revenues, and lower borrowing costs.

*Source: CHAPTER 1 PuTTINg A LId ON PubLIC debT (ch1 - CHAPTER 1 PuTTINg A LId ON PubLIC debT).*

### References

### ch1 - References

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### IMF publications, working papers, staff notes, blogs, and policy papers
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### Books, chapters, and other publications
- Brunnermeier, Markus K., and Ricardo Reis. 2023. A Crash Course on Crises: Macroeconomic Concepts for Run-Ups, Collapses, and Recoveries. Princeton, NJ: Princeton University Press.
- Kose, M. Ayhan, Peter Nagle, Franziska Ohnsorge, and Naotka Sugawara. 2021. Global Waves of Debt: Causes and Consequences. Washington, DC: World Bank.
- Fabrizio, Stefania, and Valentina Flamini. 2015. “Fiscal Consolidation and Income Inequality.” In Inequality and Fiscal Policy, edited by Benedict J. Clemens, Ruud A. de Mooij, Sanjeev Gupta, and Michael Keen, 159–74. Washington, DC: International Monetary Fund.

*International Monetary Fund | October 2024*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2024/october/english/ch1.pdf_