The planet has faced various unforeseen crises in recent years. There has been the Covid pandemic and its lasting effects; the Russian invasion of Ukraine, which has set off an energy crisis as well as inflation; not to mention the most recent blow of President Donald Trump’s trade war. To cope with such disruptions, countries have opened up their wallets to alleviate the impact on households and businesses. The world has managed to weather one high-voltage crisis after another — but in consequence, it has also racked up hefty debts.

According to the International Monetary Fund (IMF), worldwide public debt will rise above 100% of the planet’s GDP in 2029, representing its highest level since 1948, after World War II. “This reflects a higher and steeper path than projected before the pandemic,” states the IMF’s Fiscal Monitor, the annual report that analyzes fiscal imbalances, and whose latest edition was published on Wednesday as part of the organization’s annual assembly.

The institution, which was born from the 1944 Bretton Woods meetings, explains that the situation does not look the same in every part of the world. There are a handful of wealthy countries that have accumulated a heavy load of debt exceeding 100% of their GDP, including the United States, Canada, China, France, Italy, Japan and the United Kingdom. “These countries typically have deep and liquid sovereign bond markets and often broad policy choices, resulting in their fiscal risk considered moderate,” allows the IMF report.

But there are other nations, the document continues, those with developing economies and low income levels, that despite carrying much lower levels of debt, face larger fiscal challenges because “their policy options and funding access are limited.” Since 2021, over 100 states have increased their debt load to more than 60% of their GDP, a figure that will continue to grow.

Among those hundred territories with seemingly manageable debt, almost half (around 55) are experiencing debt difficulties, or are at risk of experiencing them. “When countries falter on debt, timely debt restructuring is critical to containing the damage,” states the report.

“It is not only the size of debt but also the cost,” the paper adds. The organization’s economists offer a reminder that the years following the pandemic offered flexible monetary conditions, with falling interest rates that allowed debt to remain manageable. “But the situation is now starkly different,” they warn in the report. After the inflationary crisis of the last two years, central banks have been pressured to raise interest rates. The consequence has been an increase in the cost of debt financing, which puts pressure on national governments.

This comes at a time when many countries’ budgets are being strained by other needs. In addition to higher defense spending, more funds are needed to deal with natural disaster caused by climate change, an aging population (which puts pressure on pensions and healthcare spending), as well as resources needed to drive energy and technological transitions.

“The conclusion is inescapable: starting from too high deficits and debts, the persistence of spending above tax revenues will push debt to ever higher heights threatening sustainability and financial stability,” states the report.

Such is the diagnosis, and governments must act to reduce public debt. The IMF has this prescription: “Prioritizing fiscal policy is essential to support debt sustainability and prepare fiscal buffers to use in case of severe adverse shocks including financial crises,” indicates the Fiscal Monitor.

The report recognizes that reducing debt means reducing spending or raising taxes, never easy political tasks to undertake. But, “the time to prepare is now,” it states.

Another piece of advice offered by the IMF is to change the makeup of public spending. Without reducing the total amount, allocations can be altered by directing more funds to areas that increase productivity and promote growth, such as education and infrastructure investments.

There is also room for maneuvering when it comes to taxes, although this is one of the thorniest issues for many governments. Be that as it may, the IMF advises countries with low tax revenues to “aim at gradually surpassing tax revenues above 15 percent of GDP for a growth takeoff.”

The report estimates that if low-tax-collecting developing countries tackle these tax reforms, “growth dividends from such an approach are estimated to be in double digits over the long term,” a significant figure, indeed. “Unfortunately, more than 70 developing countries still have tax-to-GDP ratios below this level, concentrated in fragile and low-income countries,” the analysis concludes.

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