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 Fiscal Monitor report published on Wednesday, the international financial institution expresses deep concerns about the worrying evolution of global public debt. Paradoxically, despite a favorable economic situation prior to the outbreak of the conflict in Iran, countries have largely failed to reduce their level of debt, thus deepening vulnerability to future crises.
“The economy remained relatively robust before the war, and growth was rather satisfactory from a global perspective. Despite this favorable situation, we did not see any 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, one must trace the spectacular evolution of global public debt since the 1970s. At that time, most countries 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 budgetary rigor in favor of expansionary policies. The 2008 financial crisis was a decisive turning point, forcing states to deploy massive stimulus plans that exploded deficits. This dynamic has been further exacerbated by the growing debt problems observed 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 perspective is even more concerning given the current geopolitically tense context.
“Taking into account the median scenario for global growth, 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 we have only seen at the height of World War II.”
These figures reveal the magnitude of the challenge facing policymakers. The international organization highlights that the crisis triggered by the conflict in Iran could further worsen the situation of global public finances, as illustrated by the downward revisions in French growth forecasts.
The Drivers of the Explosion in Public Indebtedness
Several factors converge to explain this worrying spiral. Firstly, the widespread trend towards budgetary expansion, observed “everywhere in the world, regardless of political colors,” according to the IMF’s analysis. This orientation results in increased public spending or reduced 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 does not anticipate any long-term deficit reduction, with an average of 7.5% of annual GDP expected by 2031. This trajectory is projected to raise U.S. 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 expected to be at least 8% per year until 2031 and gross public debt approaching 130% of GDP in five years, compared to nearly 100% by the end of 2025.
Consequences and Systemic Risks
This massive debt accumulation has cascading effects that are particularly concerning. The rising interest charges compel governments to divert precious tax resources from essential investments in health, education, and retirement systems.
“The consequence is that countries no longer have the necessary reserves when the next crisis hits, leaving them ill-prepared,” explains Era Dabla-Norris. This structural vulnerability exposes the global economy to future shocks with significantly diminished response capacities.
The implications go far beyond the national level. 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 U.S. financing needs increase.”
Recommendations and Action Perspectives
Facing 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. The latter is particularly urgent for the United States, which must 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, improving 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.
