Rising Global Debt Requires Countries to Put their Fiscal House in Order
IMF Blog, April 23, 2025
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Bibliographic details
- Authors: Era Dabla-Norris, Vitor Gaspar, Marcos Poplawski-Ribeiro
- Published: April 23, 2025
Overview
- Major policy shifts and recent tariff announcements have increased financial market volatility, weakened growth prospects, and raised risks.
- These developments occur against a backdrop of rising debt levels and strained public finances, with new and permanent increases in spending (such as defense) likely in many countries.
- Rising yields in major economies and widening spreads in emerging markets further complicate the fiscal landscape.
Key projections and risks
- We project global public debt to increase by 2.8 percentage points this year—more than twice the estimates for 2024—pushing debt levels above 95 percent of gross domestic product.
- Public debt is projected to be nearing 100 percent of GDP by the end of the decade, surpassing pandemic levels.
- Projections reflect the World Economic Outlook reference projections, incorporating tariff announcements made between Feb. 1 and April 4.
- Fiscal Monitor (using data up to December 2024) debt-at-risk scenario:
- In a severely adverse scenario global public debt could reach 117 percent of GDP by 2027.
- This would exceed reference projections by almost 20 percentage points and represent the highest level since World War II.
- The Fiscal Monitor estimates that a significant rise in geoeconomic uncertainty could lead to a public debt increase of approximately 4.5 percent of GDP in the medium term.
- Tighter and more volatile financial conditions in the United States may:
- Have ripple effects on emerging markets and developing economies via higher financing costs.
- Significantly impact commodity prices, resulting in lower prices and heightened price volatility.
- Limit essential spending on social programs and public investments due to high interest rates.
- Reduced foreign aid from advanced economies could complicate financing for low-income countries.
Complex policy tradeoffs
- Fiscal policy must balance:
- Reducing public debt,
- Establishing and widening buffers against spending pressures and economic shocks,
- Meeting urgent spending needs amid weaker growth prospects and higher financing costs.
- Policymakers need to find the right balance between fiscal adjustment and supporting economic growth, tailored to country-specific circumstances.
Policy recommendations and country-level guidance
- General guidance:
- Put national fiscal houses in order by implementing prudent policies within robust fiscal frameworks to build public confidence and reduce uncertainty.
- Prioritize reducing public debt and building buffers while balancing adjustment with growth support.
- Countries with limited fiscal room:
- Implement gradual and credible consolidation plans.
- Allow automatic stabilizers, like unemployment benefits, to work effectively.
- Offset any new spending needs by spending cuts elsewhere or new revenues.
- Countries with greater fiscal flexibility:
- Use available resources judiciously within well-defined medium-term plans.
- Ensure fiscal support for businesses and communities impacted by severe trade dislocations is temporary, targeted, transparent, and subject to effective cost management.
- Advanced economies:
- Tackle aging-related fiscal pressures by reprioritizing spending, advancing pension and healthcare reforms, and broadening the tax base.
- Emerging and developing economies:
- Enhance tax systems to address historically low revenues.
- Low-income developing countries:
- Stay the course on fiscal adjustments given financing challenges.
- Pursue timely and orderly debt restructuring alongside fiscal adjustments when facing debt distress.
- Cross-cutting structural policies:
- Focus on enhancing potential growth to ease tradeoffs between growth and debt sustainability.
- Implement well-designed pension and energy subsidy reforms to generate savings for social programs and infrastructure investments.
Implications
- The fiscal outlook has worsened amid significant policy changes and heightened uncertainty.
- Building public trust, ensuring fair taxation, and managing resources wisely are essential to foster resilience and promote sustainable growth in uncertain times.
—This blog is based on Chapter 1 of the April 2025 Fiscal Monitor, “Fiscal Policy under Uncertainty.”