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On October 24, 2024, the International Monetary Fund (IMF) released its Fiscal Monitor report, revealing concerning projections about the state of global public debt. According to the report, global public debt is at an elevated and unsustainable level, with total debt expected to exceed $100 trillion—approximately 93% of global GDP—in 2024. The IMF forecasts that debt will continue to rise through the end of the decade, approaching 100% of GDP by 2030, which represents a 10% increase from pre-pandemic levels in 2019.

Although the IMF suggests that debt is expected to stabilize or decline in two-thirds of countries, the levels will remain well above pre-pandemic benchmarks. Economies where debt is not expected to stabilize represent more than half of the global debt and nearly two-thirds of global GDP. The IMF also warns that actual debt levels may be higher than current estimates, and significantly larger fiscal adjustments will be necessary to stabilize or reduce debt with a high probability.

The IMF urges governments to take advantage of the current easing in monetary policy and address debt concerns immediately by implementing well-crafted fiscal policies that balance growth with protections for vulnerable households.

The Fiscal Trilemma

The IMF’s Fiscal Monitor highlights a phenomenon it calls the “Fiscal Trilemma,” which characterizes the challenges faced by economies with high deficits and public debt. The trilemma is marked by three key elements:

1.Significant expenditure demands,

2.Political constraints on increasing taxes, and

3.The need to maintain macroeconomic stability.

The core issue of the Fiscal Trilemma arises when an economy seeks to increase its spending without raising taxes, leading to financial instability, high deficits, and ballooning debt. The IMF emphasizes that economies must tread carefully and adopt more thoughtful fiscal policies to mitigate these risks.

Worse than Expected

The IMF warns that the fiscal outlook for many economies may be worse than previously anticipated. This is due to three primary factors:

1.Escalating spending demands,

2.Optimistic biases in debt forecasts, and

3.Substantial unrecognized debt.

Research from the IMF shows that political discussions around fiscal policy have increasingly favored higher spending. Nations will need to allocate more resources to address challenges such as aging populations, healthcare needs, the green energy transition, climate adaptation, and defense and energy security amidst rising geopolitical tensions.

Furthermore, past trends suggest that debt forecasts have often underestimated the reality of debt outcomes. On average, realized debt-to-GDP ratios over five years have been about 10 percentage points higher than initially projected.

In response, the IMF has introduced a new “debt-at-risk” framework that links current macro-financial conditions with a broad range of possible future debt scenarios. This method extends beyond mere debt projections, helping policymakers assess risks to the debt outlook and understand their potential origins. Under the worst-case scenario, the IMF predicts global public debt could surge to 115% of GDP within three years, nearly 20 percentage points higher than current projections. One of the primary reasons for this discrepancy is the presence of substantial unrecognized debt. In over 30 economies, 40% of unidentified debt comes from contingent liabilities and fiscal risks, many of which are related to losses in state-owned enterprises. Historically, unrecognized debt has accounted for a signi-ficant portion of GDP, averaging 1 to 1.5%. However, during periods of financial instability, this figure tends to increase substantially.

Rebuilding Fiscal Buffers and Safeguarding Debt Sustainability

Given that actual public debt may be higher than expected, the IMF argues that current fiscal measures are insufficient.

Fiscal adjustments are essential for reducing debt risks. As inflation slows and central banks lower interest rates, economies are in a better position to manage the economic impacts of fiscal tightening. However, delaying these adjustments could be both costly and risky, as required corrections become more difficult to implement over time. History shows that high debt levels and a lack of credible fiscal policies can trigger negative market reactions, limiting the flexibility of economies during times of turbulence.

The IMF’s analysis suggests that the current fiscal adjustments—averaging 1% of GDP over six years, through 2029—will not be enough to significantly reduce or stabilize debt. To stabilize debt with a high probability, an average fiscal tightening of around 3.8% of GDP is needed. For countries where debt stabilization is not expected, such as China and the United States, more substantial measures will be required. However, these economies have a broader range of policy tools at their disposal compared to other nations.

Key Elements of Required Fiscal Adjustments

The IMF outlines key components of the necessary fiscal adjustments:

1.Identifying the size: A fiscal adjustment of 3.0–4.5% of GDP is needed to effectively stabilize or reduce debt.

2.Designing the composition: Well-designed fiscal adjustments can help avoid prolonged periods of weak economic growth.

3.Calibrating the pace: Gradual, consistent fiscal adjustments can balance debt vulnerabilities while sustaining private sector demand.

4.Fast-tracking consolidation: Countries facing high debt risks and market exclusion require immediate fiscal measures, though the specifics of these measures are critical.

5.Building credibility: Governments need clear, credible fiscal plans and modern financial management systems to reduce uncertainty in fiscal policy.

6.Strengthening fiscal governance: Economies must address unrecognized debt and improve fiscal transparency.

7.Addressing distress: For countries facing debt crises, timely restructuring and fiscal adjustments are essential for regaining debt sustainability.

The Fiscal Monitor emphasizes that even in countries where public debt seems manageable, the risks remain elevated. Unrecognized debt, along with the failure to implement comprehensive fiscal adjustments, could lead to much worse outcomes than currently projected.

Conclusion

The IMF’s Fiscal Monitor report sounds an urgent alarm for many economies, urging them to address their growing debt problems. The ability to repay debt is a key indicator of an economy’s strength, and for sustained economic growth, tackling both debt and deficits is crucial. The worst-case scenario—unrecognized debt—poses significant risks, not only to fiscal conditions but also to overall economic stability. It is imperative for countries to take immediate action to identify and address unrecognized debt and to implement effective fiscal policies to stabilize their debt burdens.