The International Monetary Fund (IMF) released a report on Tuesday (October 15th) indicating that the global public debt has reached a record high and is expected to exceed $100 trillion for the first time this year, with the debt growth rate potentially faster than anticipated. The IMF is urging countries to take measures to stabilize or reduce the levels of debt.
The latest Fiscal Monitor report from the IMF projects that by the end of 2024, global public debt will reach 93% of the global Gross Domestic Product (GDP), approaching 100% by 2030. This is an increase of 10 percentage points compared to the ratio in 2019, before the COVID-19 pandemic.
The report highlights that there are compelling reasons to believe that future debt levels could be significantly higher than current expectations.
“Increasing uncertainty in fiscal policies and entrenched political red lines on taxation,” the report states. “Expenditure pressures are growing to address green transformation, aging populations, security issues, and long-term development challenges.”
The report finds that debt projections often significantly underestimate actual outcomes, with the average ratio of actual debt to GDP over the next five years expected to be 10% higher than initially forecasted. The report suggests that large undisclosed debts are one of the reasons why actual public debt is much higher than predicted.
The IMF believes that major economies like the United States and China facing sluggish growth, tightening financing conditions, and increased uncertainty in fiscal and monetary policies could further substantially increase debt levels.
The organization has introduced a new framework for “at-risk debt,” linking the current macrofinancial and political landscape with all potential debt outcomes in the future. The framework indicates that under extremely adverse conditions, global public debt could reach 115% within just three years, 20 percentage points higher than current predictions.
IMF states that the risks in debt prospects are heavily skewed towards the upside. To stabilize (or reduce) debt, governments are likely to require greater fiscal adjustments than currently planned. This is the time to rebuild fiscal buffers.
However, IMF also notes that the current efforts are insufficient to meaningfully reduce or stabilize debt. To achieve this goal, an accumulated tightening of 3.8% is needed, but countries where debt is not expected to stabilize, such as the US, China, will require more significant fiscal tightening.
The organization emphasizes that delaying fiscal adjustments will only lead to higher costs in the future.
According to Reuters, IMF’s Deputy Director of Fiscal Affairs Era Dabla-Norris stated, “Delaying adjustments would merely mean larger corrections down the road, and waiting could also be risky since past experience has shown that high debt and the absence of credible fiscal plans can trigger adverse market reactions, limiting countries’ ability to respond to future shocks.”