Fiscal: Growing Pressures on the Public Purse

Global public debt is rising again after briefly dipping from historic pandemic-era highs. Debt was already on track to reach World War II–era levels by 2028, even before the outbreak of war in the Middle East. The conflict is adding to fiscal pressures by causing a spike in energy prices, tightening financial conditions, and slowing growth, and it is unclear how long these pressures will endure. Governments must make difficult choices as they work to limit the pain from higher energy costs while preserving budgetary space. Energy-importing countries, particularly low-income countries, face the greatest pressures.

Bond markets have reacted to these dynamics accordingly. Yields on long-term sovereign bonds have risen and become more volatile. In just three years, interest payments have increased by almost half—from about 2 to nearly 3 percent of GDP—trillions of dollars globally that cannot be spent on education, infrastructure, or other pressing priorities. These costs come on top of new defense spending needs, as trade and political uncertainty are increasingly matched by security concerns.

Fiscal vulnerabilities also exacerbate risks to financial stability, raising concerns around liquidity and disruptions to foreign exchange and other financial markets. Large borrowers are issuing more short-term debt to manage interest bills. But this leaves them more exposed to sudden shifts in short-term funding conditions.

Increased debt issuance in advanced economies also has global effects, reducing the investor funds available to other sovereign borrowers—even as low-income countries must contend with cuts in development assistance.

The fiscal picture is highly worrisome across countries at all income levels. Where discretionary energy subsidies are needed and there is fiscal space, the support should be temporary and well targeted. This will help ensure that demand decreases to match lower global supply.

Starting now and reaching into the medium term, rigorous fiscal prioritization is needed as demands on the public purse continue to grow. While permanent reforms to unsustainable public pensions and regressive fuel subsidies are difficult, they are essential to help free up funds to retire debt and make transformative investments.

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Countries can mobilize revenue and create space to modernize digital infrastructure, education, and social safety nets—enabling them to benefit from AI while supporting displaced workers. They can strengthen resilience to trade and energy disruptions—and natural disasters—while still reducing total spending.

The IMF stands shoulder to shoulder with each member, helping policymakers adapt to continuous global shocks and working with them to ensure that fiscal policy stabilizes their economy. The IMF also helps establish processes such as cost-benefit analyses of investment projects and multiyear budgeting to ensure that taxpayer resources are used efficiently to increase growth.

In low-income countries, IMF expertise in revenue mobilization has helped offset declining development assistance. IMF financing has helped countries to both weather immediate crises and build long-term resilience.

As many countries prepare for populations to age and shrink, while others seek to educate and create opportunities for larger youth cohorts, the IMF will continue to support policymakers in making difficult structural reforms to unlock growth.