In view of growing debts and rising financing costs, the International Monetary Fund (IMF) sees an urgent need for action among industrialized countries. At its autumn meeting in Bangkok today, the fund appealed to political leaders that governments must adjust their spending and reduce their financial burden in the long term. The longer they waited, the more difficult it would be to make the necessary corrections.
Growth cannot solve the US debt problem
The situation is particularly tense in the USA. The national debt has exceeded $40 trillion this year. According to IMF forecasts, there is no trend reversal in sight. By 2030, the debt level could rise to more than $52 trillion.
According to IMF chief Kristalina Georgieva, the US cannot solve its debt problem through economic growth alone. In order to put the debt on a more sustainable path, further adjustments are necessary. US Treasury Secretary Scott Bessent recognizes that both the budget deficit and total debt are too high, Georgieva said. Growth helps, but it is not enough.
Rising interest rates are making the situation worse
The IMF expert Rodrigo Valdes referred to changed economic conditions. In view of the ongoing inflation and rising yields on government bonds, it is urgent to get the budgets in order. Higher returns make it more expensive for states to take on new debt on the capital market.
At the same time, financial pressure is also growing in other countries. According to the IMF, average national debt worldwide is heading towards 100 percent of economic output. This would mean it would reach its highest level since the Second World War. This will reduce the financial leeway of many governments.
High oil prices, stubborn inflation and a stronger-than-expected need for investment in artificial intelligence (AI) have contributed to a significant increase in long-term bond yields in recent months. The average yield on ten-year government bonds of the G7 countries rose by more than 110 basis points between February and September, reaching its highest level in almost two decades.
France has to save
The focus is also on France, the second largest economy in the Eurozone. The national debt there is around 119 percent of the gross domestic product - which is a significantly higher level than in Germany. The French government wants to save 43 billion euros next year. However, it remains to be seen whether the draft budget for 2027 can be implemented. Thousands of people are already protesting against the planned cuts.
Valdes had already pointed out before the meeting of the IMF and World Bank that the budget situation in the current year had generally developed worse than it did six months ago and also worse than expected a year ago. The majority of states are currently planning higher spending.
Germany also wants to increase government spending. Federal Finance Minister Lars Klingbeil has presented a budget of around 555 billion euros for 2027. The new debt, including loans for defense, infrastructure and climate protection, is expected to amount to around 204 billion euros. While the federal government wants to finance investments in infrastructure and security, among other things, savings are also planned for social benefits, development aid and climate protection.
Even higher interest costs expected
The IMF forecasts show how expensive the growing debt can become. States' average financing costs are expected to rise from 2.3 percent in 2021 to 3.7 percent by 2031. In the USA, interest payments could then reach 5.3 percent of economic output, roughly the same as social security spending.
The burden is already particularly high in poorer countries. More than 15 percent of tax revenue there now flows into debt service. Between 2011 and 2019, the average was around nine percent.
The IMF therefore warns against a further postponement. “The longer countries wait, the more painful the adjustment will be,” the fund said in a blog post.
