Baku, October 15, AZERTAC
Global public debt is very high. It is expected to exceed $100 trillion, or 93% of global gross domestic product, by the end of this year, approaching 100% of GDP by 2030. This represents 10 percentage points of GDP more than in 2019, that is to say before the pandemic, according to the official website of the International Monetary Fund.
Despite disparities between countries (public debt is expected to stabilize or decrease in two thirds of them), the October 2024 edition of the Public Finance Monitor shows that debt levels could be even higher than the projections into the future, and that much more pronounced rebalancing of public finances than currently projected is necessary to stabilize or reduce the debt with a high probability. The report argues that countries should address debt risks today with carefully crafted fiscal policies that protect growth and vulnerable households, while taking advantage of the monetary policy easing cycle.
A situation worse than expected
The fiscal outlook for many countries could be more unfavorable than expected for three reasons: strong spending pressures, the optimistic bias in debt projections, and sizable unidentified debt.
Previous IMF studies have shown that the public finance narrative across the political spectrum is increasingly supportive of higher spending. Countries will have to spend ever more to deal with aging and health care, to master the ecological transition and adaptation to climate change and to ensure defense and energy security, due to rising geopolitical tensions.
On the other hand, it has appeared in the past that debt projections tend to underestimate the actual figures quite significantly. On average, actual five-year debt-to-GDP ratios can exceed projections by 10 percentage points of GDP.
The Fiscal Monitor introduces a new “debt at risk” framework that links the current macro-financial and political situation to the full range of possible debt outcomes in the future. This method goes beyond the traditional approach focused on point estimates of debt forecasts and helps managers quantify risks to the debt outlook and identify their origins.
This system shows that, in a very unfavorable scenario, global public debt could reach 115% of GDP in three years, almost 20 percentage points more than the current projection. This could be explained by several factors: an erosion of growth, a tightening of financing conditions, budgetary slippages and an increase in economic and political uncertainty. Importantly, countries are increasingly exposed to international factors that impact their borrowing costs, including spillover effects from greater political uncertainty in systemically important countries like the United States.
A sizable unidentified debt is another reason why public debt ends up being significantly higher than projected. A study of more than 30 countries concludes that 40% of unidentified debt arises from contingent liabilities and fiscal risks faced by governments, most of which are linked to losses of state-owned enterprises. In the past, unidentified debt has averaged between 1% and 1.5% of GDP, a high level. It increases sharply during periods of financial difficulties.
A more marked rebalancing of public finances
If public debt is higher than it appears, current fiscal measures are probably smaller than necessary.
Budgetary rebalancing plays a decisive role in containing debt risks. In a context of moderating inflation and lowering of key rates by central banks, countries are better equipped today to cushion the economic consequences of budgetary tightening. A delay would be both costly and risky since the necessary correction grows over time. Furthermore, it appears that high debt and the absence of a credible fiscal plan can provoke a negative market reaction, which limits the room for maneuver in the event of turbulence.
It emerges from our analysis, which takes into account country-specific risks surrounding debt prospects, that the current rebalancing of public finances (of 1% of GDP on average over six years by 2029), even if they are carried out in full, are not sufficient to significantly reduce the debt or stabilize it with a high probability. A cumulative tightening of around 3.8% of GDP over the same period would be required for an average country to ensure a high probability of debt stabilization. In countries where debt is not expected to stabilize according to projections, for example in China and the United States, the efforts required are much greater. However, these two heavyweights have at their disposal a much larger arsenal of solutions than other countries.
Focus on individuals
Such pronounced budgetary rebalancing, if not well calibrated, will cause heavy production losses due to the decline in overall demand and can harm vulnerable categories and widen inequalities. Rigorous preparation is therefore essential to reduce the costs of adjustment and to generate public support for the necessary budgetary rebalancing.
The choice of budgetary measures is important since their effects are not identical and involve trade-offs. For example, reducing public investment causes the heaviest production losses and weighs on long-term growth prospects, while reducing social transfers penalizes vulnerable households and accentuates inequalities.
An appropriate mix of people- and growth-focused fiscal measures is required, which will vary from country to country. Advanced countries should accelerate welfare reforms, reprioritize spending, and raise revenues where taxes are low. Emerging and developing countries, for their part, show greater potential for increasing tax revenues, by broadening tax bases and strengthening the capacities of tax administration, while consolidating social protection systems and preserving public investment to stimulate long-term growth.
Speed of action also plays an essential role. Our analysis shows that a measured and sustained pace of rebalancing would mitigate fiscal risks, while limiting the negative impact on output and inequality to around 40% less than a more abrupt tightening. However, some countries at high risk of debt distress will need concentrated adjustments at the front end.
Rebalancing must go hand in hand with strengthening fiscal governance, through credible medium-term frameworks, independent fiscal advice and rigorous risk management. Better assessment of fiscal risks, close monitoring of contingent liabilities in SOEs, and publication of detailed and timely debt statistics can reduce unidentified debt.
The scale of the public debt is worrying. Even for some countries whose public debt appears sustainable, the Public Finance Monitor suggests that the risks are high, and the actual debt figures in the coming years could be worse than projected. Current rebalancing plans are not sufficient to stabilize or reduce debt with certainty. The report also shows that well-designed public financial consolidations can help reduce debt risks, improve the public debt outlook and mitigate negative impacts on society.
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