War Shock Requires Disciplined Fiscal Reaction

IMF Blog, April 15, 2026

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War Shock Requires Disciplined Fiscal Reaction

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Bibliographic details

• Authors: Krzysztof Bankowski, Natasha X Che, Era Dabla-Norris, Rodrigo Valdes
• Published: April 15, 2026

Overview

• The Middle East war is increasing global uncertainty while public finances are already strained by long-term issues.
• Higher energy and food prices, tighter financial conditions, and greater uncertainty are prompting renewed calls for fiscal support.
• The Fiscal Monitor argues that, with debt already elevated in many countries, fiscal policy must provide targeted support where needed without pushing public finances closer to the brink.

Weak starting position

• Pre-war public finances were already stretched due to the pandemic, the 2022 energy and food price shock, and rising trade disruptions.
• Even with robust global growth in 2025, there was no meaningful progress in repairing budgets.
• Key findings:
  • Global fiscal deficit remained at 5 percent of gross domestic product in 2025.
  • Gross public debt rose to 94 percent of GDP and is projected to reach 100 percent by 2029—one year earlier than expected just a year ago.
  • Interest spending climbed rapidly, from 2 to nearly 3 percent of GDP in only four years.
  • The gap between countries’ medium-term fiscal plans and what would be needed to stabilize debt globally has widened.

Structural challenges

• Fiscal pressures are increasingly structural rather than cyclical or temporary.
• Persistent demands on budgets include security spending, climate and energy transition costs, and rising interest bills, while revenues have not kept pace.
• Consequence:
  • Every choice on revenue and spending has more lasting consequences; delaying consolidation narrows options and raises risks.

Risks and scenarios

• The reference forecast assumes the war’s disruptions would ease by mid-2026, but that assumption is uncertain.
• Severe scenario (from the World Economic Outlook) considered:
  • Oil prices stay 100 percent higher than projected in 2027.
  • Inflation pressures reemerge and financing conditions tighten.
  • Under these conditions, global debt-at-risk—defined as the 95th percentile of the projected debt distribution three years ahead—would exceed 120 percent of GDP, up from 117 percent in the WEO reference scenario, with the increase concentrated in emerging market and developing economies.
• Other risks:
  • Fragmentation in trade and finance can lower growth and raise financing costs.
  • Political instability can weaken reform and revenue collection.
  • Abrupt repricing in markets (including in now dominant AI stocks) could tighten financial conditions quickly.
  • As central banks unwind balance sheets, governments must rely more on private investors to absorb growing debt issuance, making borrowing costs more sensitive to market sentiment.

Disciplined policy response (recommendations)

• Fiscal discipline defined: choosing policies that protect stability today without undermining it tomorrow.
• Targeting and temporariness:
  • Help for companies and families facing higher energy or food costs should be targeted and temporary, focusing on those most exposed and least able to absorb price increases.
  • Existing social safety nets built during the pandemic can—and should—be used again.
• Financing constraints:
  • Countries with narrow fiscal space should avoid financing support measures with additional borrowing.
  • Prefer reallocating spending within existing limits and prioritizing crisis-related spending over new borrowing.
• Coordination with monetary policy:
  • Fiscal and monetary policies should be tightly coordinated.
  • Emergency spending should not create new aggregate demand that undermines central banks’ efforts to contain inflation.
• Avoid broad, costly measures:
  • Broad measures such as fuel subsidies are costly, poorly targeted, difficult to reverse, and encourage higher consumption when supply is constrained—pushing global prices higher.
• Medium-term consolidation:
  • Short-term shocks must not distract from restoring fiscal resilience through credible medium-term consolidation.
  • Actions needed: concrete measures and realistic sequencing, confronting spending pressures directly, reducing inefficiencies, reconciling competing demands.
• Revenue measures:
  • Broaden tax bases, streamline exemptions, and strengthen tax administration to raise revenues even in constrained settings.
• Governance and communication:
  • Well-designed fiscal frameworks, greater transparency, and clear communication of trade-offs can help build public support for durable reform.
  • Acting early and decisively is critical to preserving stability in a world of recurring shocks and elevated debt.

Key statistics and projections

• Global fiscal deficit: 5 percent of gross domestic product in 2025.
• Gross public debt: 94 percent of GDP (2025), projected to reach 100 percent by 2029.
• Interest spending: rose from 2 to nearly 3 percent of GDP in four years.
• Severe scenario: oil prices 100 percent higher than projected in 2027.
• Debt-at-risk (95th percentile, three years ahead): would exceed 120 percent of GDP, up from 117 percent in the WEO reference scenario.

War Shock Requires Disciplined Fiscal Reaction — April 15, 2026

References

• Fiscal Monitor