Policy Challenges and Bringing Down Public Debt
IMF News, June 7, 2024
Source details
- Canonical URL
- Policy Challenges and Bringing Down Public Debt
Other formats
Bibliographic details
- Published: June 7, 2024
Context and purpose
- Opening Remarks by Deputy Managing Director Kenji Okamura at the Fiscal Policy and Sovereign Debt Conference, June 7, 2024.
- Conference part of the IMF’s Sovereign Debt Network project bringing together leading scholars and senior policymakers to discuss fiscal policy and public debt.
Key facts and projections
- Global debt: 93 percent of GDP.
- Global debt is 9 percentage points above pre-pandemic highs.
- Global debt is projected to reach around 100 percent of GDP by 2029.
- Forecast national debt-to-GDP ratios by 2028: US 133 percent, China 106 percent, Japan 251 percent.
- Observation: These national levels historically have only been seen during wartime.
- High debt combined with high interest rates leads to rising debt service costs and constrained fiscal space.
- Weak medium term growth prospects compound the fiscal challenge.
- Some economies, particularly low-income countries, are already in debt distress.
Major risks and channels of spillovers
- High debt in large economies can generate substantial negative spillovers for the global economy via financial channels.
- US debt growth over the next five years and beyond could mean higher-for-longer interest rates transmitted internationally.
- Risk sentiment originating in financial centers can spill over and harm global growth and investment.
- Spillovers can render otherwise sustainable fiscal paths in other countries unsustainable.
- For emerging market and developing economies, sovereign liquidity risks and default risks are interconnected; who holds debt, debt composition, and debt-carrying capacity are critical considerations.
Four analytical questions highlighted
- What makes a debt reduction plan sustainable, and how can governments commit to ambitious but credible adjustment plans?
- Growth can help, but a significant and broad-based slowdown in productivity makes this less likely in coming years.
- Reducing debt for most countries requires curbing budget deficits and building public support for difficult choices.
- What are the implications of rising public debt levels in large economies such as the United States for global spillovers?
- Policymakers must strengthen their own fiscal policies and frameworks to mitigate spillovers.
- As shown in the April 2024 Fiscal Monitor, tighter fiscal policy in the US can help reduce spillovers to other countries through financial channels.
- What are the trade-offs of exploiting the “convenience yield” of reserve currencies (e.g., the US dollar), and can it be eroded by fiscal irresponsibility?
- US public debt provides a funding advantage as a global safe asset; this “exorbitant” privilege can be eroded, likely as a slow-moving process, if the issuer’s creditworthiness is questioned due to high debt.
- Running large deficits and debts because of the convenience yield can create a vicious cycle.
- How will aging and shrinking populations—including in countries like Japan—influence fiscal outcomes?
- Many developed countries may face sustained deficits in the not-too-distant future due to demographic pressures.
- Understanding demographic impacts on fiscal outcomes is crucial for policy navigation.
Policy tools and recommendations emphasized
- Build public support for deficit reduction through credible medium-term fiscal frameworks.
- Strengthen oversight by independent fiscal institutions.
- Use fiscal rules to anchor expectations about the future path of fiscal policy.
- Prepare for and mitigate negative international spillovers by strengthening domestic fiscal policies and frameworks.
- Recognize the special role and risks associated with reserve-currency issuer liabilities and manage debt levels to protect creditworthiness.
Purpose of the conference
- Provide a forum to explore the above questions and exchange insights and research to shape fiscal policy trajectories in challenging times.
Opening Remarks by Deputy Managing Director Kenji Okamura at the Fiscal Policy and Sovereign Debt Conference, June 7, 2024.