In a veiled swipe at the United States — where the budget deficit is likely to top 6 percent of GDP this year, despite the economy still growing robustly — the Fund said buildups of indebtedness in key states in the economic order could easily spill over and affect nations that are whittling down their debt piles. It noted that such global factors have become increasingly prominent in setting market interest rates worldwide.
Global budget deficits widened during the pandemic as governments rushed to support the incomes of those affected by lockdowns. They then came under fresh pressure — particularly in Europe — as Russia’s invasion of Ukraine in 2022 triggered a huge spike in energy prices. Aging populations, investments into the green transition and an end to the post-Cold War ‘peace dividend’ appear set to ensure that fiscal policy stays under pressure for the foreseeable future.
The new report comes as a handful of EU capitals that are still overspending submit their debt reduction plans to the European Commission. Under a new version of the EU’s budget rules, countries have between four and seven years to put their debt on a sustainable downward trajectory.
The IMF estimates that, globally, countries need to tighten fiscal policy — in other words, to raise taxes or cut spending — by 3 to 4.5 percent of GDP over the medium term to have a good chance of stabilizing their debt ratios.
“Delaying would be both costly and risky,” it wrote. “The required adjustment will only become larger and may even become untenable if markets react negatively or if an adverse shock hits the economy.”
As usual, the fund urged countries to prioritize cutting subsidies to avoid having to cut productive investment.