## High Debt, Hard Choices

## Source details

**Canonical URL:** [High Debt, Hard Choices](https://www.imf.org/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris)

## Other formats

- [Markdown version](/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris/index.md)
- [Structured JSON version](/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris/index.json)
- [Bundle manifest](/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris/bundle-manifest.json)

## Bibliographic details
- Authors: ERA DABLA-NORRIS, RODRIGO VALDES
- Published: March 3, 2026

---

### Overview
- Mounting public debt and rising interest rates are stretching public finances and forcing difficult fiscal decisions.
- Fiscal trade-offs that were postponed under two decades of unusually low interest rates now require resolution as borrowing costs rise and demand for public funds grows.
- Trust in government is identified as a key scarce resource needed to reconcile competing fiscal priorities.

### Debt burden and fiscal predicament
- Global public debt climbed to 93.9 percent of GDP in 2025 and is on track to breach 100 percent by 2028—levels never seen in peacetime.
- Borrowing costs have doubled or tripled within a short span, increasing interest bills and crowding out other budget priorities.
- Country examples and patterns:
  - In the US, net interest payments climbed from about 2 percent of GDP before the pandemic to 4.2 percent in 2025—surpassing defense spending—and are set to rise further.
  - In low-income countries, interest payments consume 21 percent of tax revenues on average.
- Macro-financial risks and constraints:
  - High debt reduces fiscal space to respond to shocks, raises the cost of capital, complicates monetary policymaking, and can motivate financial repression.
  - Elevated debt increases the risk of sudden and sharp market-driven adjustments (Dornbusch’s insight invoked).
  - Above certain thresholds, additional borrowing forces painful decisions—through austerity, inflation, financial repression, or default.

### Fiscal trade-offs and policy dilemmas
- Size of government vs. revenue:
  - Rising demands for social safety nets, health care, education, public investment, and risk protection clash with limited willingness to raise revenue.
  - “Governments cannot provide Nordic-level benefits without Nordic-level taxation.”
- Credibility vs. flexibility:
  - Need for credible medium-term fiscal anchors with escape clauses for rare shocks; transparent plans that prioritize investment while protecting the vulnerable; institutional frameworks that build confidence without straitjacketing policy.
- Invest now vs. conserve firepower:
  - Choices to spend on national security, climate transition, resilience, and inclusion reduce buffers for future crises.
  - Fiscal strategies should be robust to adverse surprises—“it pays to hold something back when the next crisis may be just around the corner.”
- Political economy:
  - Each budget decision has explicit winners, losers, and timing; postponing choices exacerbates future adjustment costs and complicates politics.

### Intergenerational challenges and fairness
- Debt as intergenerational issue:
  - Persistent deficits are financed by debt that future workers and taxpayers must service; high debt shifts income toward creditors at the expense of public goods.
  - Recent debt has often financed current consumption or avoidance of tough choices, transferring more burden to future taxpayers.
- Demographics amplify pressures:
  - Advanced economies now have about three workers per retiree, down from roughly four in 2000, and the number is heading toward two workers by 2050 (OECD 2025).
  - Aging populations and off-balance-sheet pension and health obligations can surface with destabilizing force.
- Policy choices for fairness:
  - Options include raising taxes, lowering benefits, or continuing to borrow—each has distributional and political consequences.
  - Delaying adjustment typically makes later adjustments more abrupt and onerous, with the bill falling on fewer people.

### Citizens’ perceptions, trust, and political constraints
- Evidence of trust deficit:
  - A 2024 survey of 27,000 people in 13 countries shows widespread misunderstanding of basic fiscal issues.
  - Only about 42 percent of respondents understood that raising taxes or cutting spending would reduce a government deficit.
  - More than 60 percent underestimated their country’s debt-to-GDP level, especially in high-debt countries.
- Trust and expectations:
  - Respondents who report more trust in their government are 20 percent more likely to believe that its policies will help stabilize or reduce public debt.
  - Those with greater trust are 17 percent more likely to expect a positive impact on their own welfare from debt-reduction policies.
- Political economy dynamics:
  - Fear of losing pensions or essential services and doubts about fair burden-sharing reduce public support for reforms.
  - Past experiences with austerity, corruption, or misused stimulus funds erode confidence and fuel cynicism.
  - Mistrust can create a vicious cycle: leaders postpone measures, debt worsens, and trust falls further.

### Building trust: institutional measures and practical reforms
- Trust-building elements:
  - Budget transparency and well-structured public financial management.
  - Independent fiscal councils with clear mandates, real autonomy, and strong technical expertise (example: The Netherlands).
  - Spending evaluations, tax expenditure reports, and impact assessments to clarify where money goes and what it delivers.
  - Prudent management of the public wage bill and efficient procurement to reduce perceptions of waste.
  - Reducing special tax regimes and pension privileges to enhance fairness.
  - Strong oversight of state-owned enterprises to signal responsibility and competence.
- Reform approach:
  - Avoid indiscriminate austerity; pursue gradual, well-calibrated steps that place debt on a sustainable path while protecting investment and the vulnerable.
  - Policymakers should be honest about trade-offs, prioritize investment, and design fiscal frameworks with credible anchors and transparent escape clauses.
  - Building and sustaining trust is essential for persuading citizens to accept near-term sacrifices for longer-term stability.

### Key statistics and survey findings (verbatim)
- Global public debt: 93.9 percent of GDP in 2025; on track to breach 100 percent by 2028.
- US net interest payments: about 2 percent of GDP before the pandemic; 4.2 percent in 2025.
- Interest payments in low-income countries: 21 percent of tax revenues on average.
- Workers per retiree in advanced economies: about three now; roughly four in 2000; heading toward two by 2050 (OECD 2025).
- Survey: 27,000 people in 13 countries (conducted in 2024).
- Fiscal knowledge and perceptions from survey:
  - About 42 percent understood that raising taxes or cutting spending would reduce a government deficit.
  - More than 60 percent underestimated their country’s debt-to-GDP level.
  - Respondents with more trust are 20 percent more likely to believe government policies will stabilize or reduce public debt.
  - Respondents with greater trust are 17 percent more likely to expect a positive impact on their own welfare from debt-reduction policies.

*Era Dabla‑Norris and Rodrigo Valdés, “High Debt, Hard Choices,” F&D Magazine, March 2026.*

---

## Content in this bundle

- **High Debt, Hard Choices**
  - [High Debt, Hard Choices (Markdown version)](/-/media/files/publications/fandd/article/2026/03/dabla-norris.pdf.md){rel="alternate" type="text/markdown"}
  - [High Debt, Hard Choices (PDF)](/-/media/files/publications/fandd/article/2026/03/dabla-norris.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris_