IMF sounds alarm on soaring sovereign debt
The International Monetary Fund (IMF) has urged governments to bear down on profligate spending after it found government debt was on course to reach 100 per cent of global GDP within the next five years.
In its latest Fiscal Monitor report, the world’s preeminent financial institution sounded the alarm on developed and developing nations’ over-reliance on borrowing, warning it threatened “financial stability” if governments do not urgently curb their yawning deficits.
“The persistence of spending above tax revenues will push debt to ever higher heights threatening sustainability and financial stability”, the paper said. “Prioritising fiscal policy is essential to support debt sustainability and prepare fiscal buffers to use in case of severe adverse shocks including financial crises. But while we do recognise that the fiscal equation is very hard to square politically, the time to prepare is now.”
Debt higher than aftermath of WW2
Global government debt is on track to rocket past 100 per cent of the sum total of economic activity across the planet by as soon as 2029, the Washington-based fund projected, the highest level since the immediate fallout from World War 2. It put a five per cent likelihood that global debt could top 120 per cent of global income in the same period, given the current trend is towards “debt accumulating even faster”.
The report namechecked the UK as one of several countries whose debt to GDP ratio – the difference between a nation’s annual economic output and total sovereign debt -would break the 100 per cent mark in the next five years. In doing so, the country would join the likes of Japan, France, Canada and the US whose debt levels have already eclipsed the unwanted milestone.
UK still suffering from Covid debt
UK policymakers have struggled to quash runaway borrowing since the coronavirus pandemic caused all Western governments to run record deficits in a bid to keep their economies afloat. In 2024, the public sector spent 4.8 per cent more than it earned via taxes, leaving its fiscal policy beholden to volatile global debt markets that currently levy interest of more than five per cent on 10-year government bonds, known as gilts.
The country’s ballooning debt pile – which now stands at more than £3 trillion – means the government now spends twice as much on interest payments to bondholders as it does on defence, making it effectively the third largest government department.
Excluding debt interest payments, the IMF added the UK economy was on track to operate at a budget surplus in three years’ time, which would peak at 0.7 per cent of GDP by 2030.
Despite that, the IMF’s deputy director for monetary and capital markets, Athanasios Vamvakidis, told reporters that debt markets felt uneasy about the UK’s fiscal path.
“Clearly markets are concerned about the UK economy, and we have seen more volatility in the UK compared to other advanced economies,” he said.