IMF Raises Concerns Over Rising Global Public Debt

The International Monetary Fund (IMF) has expressed concern over the increasing public debt in countries worldwide, with the United States being a notable example due to its continuous fiscal deficits and growing spending pressures.

IMF's Fiscal Monitor Report

The IMF's most recent Fiscal Monitor report, released on October 15, predicts that global public debt will surpass $100 trillion in 2024, which is equivalent to about 93% of the global gross domestic product (GDP). The report suggests that this could reach 100% of GDP by the end of the decade. The United States faces significant risks if fiscal policies are not urgently adjusted.

Need for Carefully Crafted Fiscal Strategies

The report emphasizes the need for countries, including the United States, to address debt risks with carefully crafted fiscal strategies. The IMF warns that debt levels could be worse than expected due to large spending pressures, considerable unidentified debt, and overly optimistic debt projections.

Unidentified Debt and Its Risks

Unidentified debt, which includes liabilities that are not explicitly listed in budget documents, poses a significant risk to debt sustainability. These liabilities include contingent liabilities, losses at federally-owned enterprises like the U.S. Postal Service, and other off-balance-sheet obligations. The report's executive summary states, "There are good reasons to believe that future debt levels could be higher than currently projected." It highlights that actual debt-to-GDP ratios three years ahead tend to be about 6 percentage points higher than initially forecasted, on average.

Factors Leading to Underestimation of Debt Levels

The IMF attributes the potential underestimation of debt levels to several factors. These include a political climate that increasingly favors higher government spending, driven by concerns about security, an aging population, and the push to invest in green transitions.

Rebuilding Fiscal Buffers and Containing Debt

The report urges countries to rebuild fiscal buffers in a growth-friendly manner and contain debt to ensure sustainable public finances and financial stability. In a related blog post titled "Global Public Debt Is Probably Worse Than It Looks," IMF economists argue that current efforts to curb debt growth are insufficient. They warn that delays in fiscal actions will lead to even higher costs and greater risks.

Need for Proactive Measures

The economists emphasize the need for proactive measures such as reducing spending. They argue that planned fiscal adjustments, such as reducing spending by 1% of GDP over six years, are insufficient to stabilize debt. Instead, they suggest a cumulative tightening of 3.8% of GDP to significantly reduce debt levels. They assert that the effort required in the United States is "substantially greater."

Urgency of Substantial Fiscal Adjustments

Without substantial fiscal adjustments, U.S. debt will continue on an unsustainable path, warns the report. The country faces increasing spending demands, largely due to health care costs, aging populations, and defense needs, all of which are exacerbated by growing geopolitical tensions.

Reforming Mandatory Spending Programs

The IMF identifies the reform of mandatory spending programs, such as Social Security and Medicare, as a crucial step. These programs account for a large and inflexible share of the U.S. budget, and reforming them could help control expenditures. In addition to spending cuts, the IMF suggests that the United States could increase revenues by raising taxes or removing tax exemptions.

IMF's "Debt-at-Risk" Framework

The IMF's newly developed "debt-at-risk" framework—a tool used to estimate potential debt outcomes under different economic conditions—indicates that U.S. public debt could rise sharply under adverse scenarios.

Need for Stronger Fiscal Governance

The IMF also emphasizes the importance of stronger fiscal governance, describing it as "key to mitigating the buildup of unidentified debt and containing debt vulnerabilities." Countries with better fiscal governance—marked by budget transparency and adherence to fiscal rules—tend to have lower levels of unidentified debt, even during times of financial stress.

Bottom Line

The IMF's warning about the rising tide of global public debt, particularly in the United States, is a cause for concern. It underscores the need for urgent fiscal adjustments, proactive spending cuts, and stronger fiscal governance. However, implementing these measures is easier said than done, given the various factors driving up government spending. What are your thoughts on this issue? Feel free to share this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.