A Worrying Trajectory of Global Debt According to the IMF
The International Monetary Fund (IMF) is sounding the alarm with unusual solemnity. In its latest report Fiscal Monitor published on Wednesday, the international financial institution expresses deep concerns about the alarming evolution of global public debt. Paradoxically, despite a favorable economic situation prior to the escalation of the conflict in Iran, countries have generally failed to reduce their levels of debt, thus deepening vulnerability to future crises.
“The economy remained relatively robust before the war, and growth was fairly satisfactory from a global perspective. Despite this favorable environment, we have seen no measurable progress in reducing deficits and debt,” laments Era Dabla-Norris, Deputy Director of the IMF’s Fiscal Affairs Department, in an interview with AFP.
Historical Evolution: From Prudent Management to Debt Explosion
To understand the extent of the current crisis, it is necessary to trace the spectacular evolution of global public debt since the 1970s. At that time, most states maintained relatively modest debt ratios, generally below 40% of GDP for developing countries.
The oil shocks of 1973 and 1979 marked the beginning of a new era. Governments gradually abandoned post-war fiscal austerity in favor of expansionary policies. The 2008 financial crisis was a decisive turning point, forcing states to implement massive stimulus plans that exploded deficits. This dynamic has been further accentuated by the increasing debt problems seen in many developing countries.
The COVID-19 pandemic has completely disrupted the balance of global public finances. The exceptional support measures deployed to preserve economies have propelled global public debt to unprecedented levels, now reaching 94% of global GDP according to the latest IMF estimates.
Alarming Projections by the IMF for 2029
The forecasts from the Washington institution paint a particularly bleak picture. Without a radical change in trajectory, global public debt could surpass the symbolic threshold of 100% of global GDP by 2029. This prospect is even more worrying given the currently tense geopolitical context.
“Taking into account the median global growth scenario, the risk of global debt could reach 116% of GDP, and even 120% in the worst-case scenario,” warns Era Dabla-Norris. “This is a level that we have only seen at the height of the Second World War.”
Drivers of the Public Debt Explosion
Several factors converge to explain this worrying spiral. Firstly, the generalized trend towards fiscal expansion, observed “everywhere in the world, across all political spectrums,” according to the IMF analysis. This trend results in increased public spending or decreased taxes, without sufficient revenue in return.
The world’s two largest economies, the United States and China, bear particular responsibility in this dynamic. Regarding the United States, the IMF anticipates no long-term reduction in the deficit, which is expected to average 7.5% of annual GDP by 2031. This trajectory is expected to push US net debt to 115.4% of GDP over the next five years, an increase of over 15 points.
The situation in China presents similarly concerning similarities, with a public deficit of at least 8% per year until 2031 and a gross public debt approaching 130% of GDP in five years, compared to nearly 100% by the end of 2025.
Consequences and Systemic Risks
This accumulation of debt generates particularly worrying cascading effects. The increase in interest expenses forces governments to divert valuable tax resources from essential investments in health, education, and retirement systems.
“The consequence is that countries no longer have the reserves necessary when the next crisis occurs, and they are left without them,” explains Era Dabla-Norris. This structural vulnerability exposes the global economy to future shocks with significantly diminished response capabilities.
The implications go beyond national boundaries. The massive indebtedness of the United States, the world’s largest economy, “raises concerns about the sustainability of the debt, not only for the United States,” but also for other countries whose access to financing could become more complicated as US financing needs increase.
Recommendations and Action Perspectives
Faced with this critical situation, the IMF advocates for a balanced approach combining several levers. The institution recommends “calibrated and measured” structural reforms to keep debt on a more sustainable path, accompanied by progressive fiscal consolidation. This is especially urgent for the United States, which needs to reduce its deficit by 4 percentage points according to the institution. Furthermore, fundamental reforms of retirement and health systems, especially in China, are imperative to address demographic aging. Finally, an improvement in tax systems would optimize public revenues.
The international institution nevertheless highlights some encouraging examples of positive evolution, citing Portugal, Spain, and Greece, which have managed to restore their public finances after the eurozone crisis. These experiences show that fiscal consolidation remains possible, even in unfavorable circumstances.
