Global public debt is very high and is expected to exceed $100 trillion, or about 93 percent of global gross domestic product (GDP), by the end of this year, and will approach 100 percent of GDP by 2030, stated the International Monetary Fund (IMF) in its latest release.
The October 2024 Fiscal Monitor reveals that future debt levels could be even higher than the IMF projected. In addition, much larger fiscal adjustments than currently projected are required to stabilize or reduce it with a high probability. The report argues that countries should confront debt risks now with careful fiscal policies that protect growth and vulnerable households while taking advantage of the monetary policy easing cycle.
Global public debt may reach 115 percent of GDP
“In a severely adverse scenario, global public debt could reach 115 percent of GDP in three years — nearly 20 percentage points higher than currently projected,” added the IMF.
This could be due to several reasons including weaker growth, tighter financing conditions, fiscal slippages, and greater economic and policy uncertainty. Besides, countries are increasingly vulnerable to global factors affecting their borrowing costs. This also includes spillovers from greater policy uncertainty in systematically important countries like the United States.
The IMF added that fiscal adjustment plays a crucial role in containing global public debt risks. With inflation moderating and central banks lowering policy rates, economies are in a better position now to absorb the economic effects of fiscal tightening. Delaying policy easing would be both costly and risky, as the correction margin grows as time goes by.
“Experience shows that high debt and lack of credible fiscal plans can trigger an adverse market reaction, constraining room to manoeuver in the face of turbulence,” added the IMF.
Fiscal adjustments not enough
Accounting for country-specific risks surrounding the debt outlook, the IMF suggests that current fiscal adjustments are not enough to significantly reduce or stabilize debt with a high probability.
A cumulative tightening of about 3.8 percent of GDP over the same period is critical for an average economy to ensure a high likelihood of debt stabilization. In countries where the IMF expects debt to stabilize, such as China and the United States, the effort is substantially greater. However, these two largest economies have a much richer set of policy choices than other countries.
For more news on banking & finance, click here.
