The International Monetary Fund issued a warning on Wednesday, expressing concerns that the global public debt situation may be more severe than commonly perceived, particularly due to the escalating fiscal deficits in the United States and China.
According to the IMF’s annual Fiscal Monitor report, global public debt is projected to surpass $100 trillion by the conclusion of 2024. The agency also anticipates that by the end of the decade, worldwide public debt will reach 100% of the global GDP.
The United States and China are major contributors to the increasing levels of public debt. Excluding these two countries from the calculations would result in a global public debt to GDP ratio dropping to approximately 20%, as stated by the IMF.
Vitor Gaspar, the IMF’s director of fiscal affairs, remarked that the public debt situation may be more concerning than it appears. He highlighted that governments’ debt assessments are often overly optimistic and tend to underestimate the actual figures.
The IMF’s report identified a “fiscal policy trilemma” that governments are grappling with. They are faced with the challenge of needing to increase spending to ensure security and economic growth, while encountering resistance to higher taxation as public debt levels become increasingly unsustainable. Countries in sub-Saharan Africa are particularly strained due to the necessity of spending to combat poverty, coupled with limited tax capacities and challenging financial conditions.
Countries with unsustainable debt levels are at risk of experiencing sudden market sell-offs if investors perceive their fiscal health as precarious. This uncertainty, prevalent even in advanced economies like the U.S. and China with higher debt tolerance, can lead to a ripple effect of elevated borrowing costs for other economies.
In October, the U.S. Treasury Department disclosed that the nation’s budget deficit had surged to $1.833 trillion, marking the highest level outside of the pandemic period. The U.S. has faced potential government shutdowns in recent years as disagreements over government funding bills have intensified among politicians, raising concerns about the country’s fiscal well-being.
The IMF’s China country report from August highlighted the significant role of local government spending in China’s substantial fiscal deficit. Although local government spending decreased in 2023, this reduction was offset by diminished revenues resulting from extended tax relief measures.
