Global Debt Could Rise to Post-World War II High

The International Monetary Fund (IMF) expects global public debt to reach 95% of GDP in 2025, a 2.8% increase from 2024.

This is more than double the IMF's estimate of global public debt levels last year, according to the Fiscal Monitor report released Wednesday on the sidelines of the IMF-World Bank Spring Meetings.

The IMF expects global public debt to continue its upward trend in the coming years, reaching 99.6% of global GDP, surpassing its levels during the COVID-19 pandemic.

The IMF says these figures are based on its World Economic Outlook reference projections, which reflect tariff announcements amid significant political uncertainty and the shift in the current economic landscape, potentially further increasing debt levels.

The IMF lowered its forecasts for global economic growth in 2025 and 2026 to 2.8% and 3%, respectively, anticipating that the current trade war will have a significant impact on global economic activity.

In this current economic environment, fiscal policy faces critical challenges, including balancing debt reduction, building buffers against uncertainty, and meeting urgent spending needs amid weak growth prospects and rising financing costs.

The IMF says that addressing these complexities will be essential to promoting stability and growth amid the risk of rising debt.

According to the Fiscal Monitor report on Debt at Risk, which uses data through December 2024, under the most adverse scenario, global public debt will reach 117% of GDP by 2027.

The IMF says this forecast represents the highest level since World War II and is approximately 20% above the baseline forecast.

The Fund expects debt levels to rise further if revenues and economic output decline more than currently forecast due to higher tariffs and weaker growth prospects.

It adds that heightened geoeconomic uncertainty could exacerbate debt risks, leading to higher public debt through increased expenditures, particularly on defense and fiscal claims.

Subsidies could also increase for those exposed to severe disruptions from trade shocks, increasing public spending.

The Fiscal Monitor estimates that a significant increase in geoeconomic uncertainty could increase public debt by about 4.5% of GDP over the medium term.

The IMF says that tighter and more volatile financial conditions in the United States could have a multiplier effect on emerging markets and developing economies, increasing financing costs. Higher interest rates could also limit essential spending on social programs and public investments.

The IMF believes that countries first and foremost need to put their fiscal houses in order, which means implementing prudent policies within a strong fiscal framework.

The IMF advises governments around the world to prioritize reducing public debt and building and expanding monetary reserves to address spending pressures and economic shocks. This requires finding the optimal balance between adjustment and supporting economic growth, tailored to each country's specific situation, available resources, and overall economic conditions.

The IMF says that countries with limited fiscal space in their government budgets should implement gradual and credible fiscal consolidation plans, with any new spending needs offset by spending cuts in other areas or new revenues.

For countries with greater fiscal flexibility, it is important to use these funds wisely within well-defined medium-term plans. Financial support for businesses and communities affected by severe business disruptions should be temporary and targeted, with a strong emphasis on transparency and effective cost management.