IMF chief warns of ‘unforgiving’ debt backdrop and low growth

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The head of the IMF has warned of an “unforgiving” economic backdrop for government finances around the world as she highlighted a widespread reluctance among politicians to rein in spending and raise taxes.

Kristalina Georgieva, the fund’s managing director, said rising levels of borrowing meant a growing share of government revenues was being used to cover interest payments, while “lacklustre” growth heightened the challenge of curbing debts.

“Our forecasts point to an unforgiving combination of low growth and high debt — a difficult future,” said Georgieva. Countries faced “high and rising public debt — way higher than before the pandemic”, she added, even after a fall in debt-to-GDP levels as inflation lifted nominal growth.

The managing director’s remarks ahead of next week’s IMF and World Bank annual meetings come as global public debt heads to a record $100tn by the end of 2024. Borrowing surged during the early stages of the coronavirus outbreak as economies were locked down. Many governments, including those of the world’s largest economies, are yet to bring spending under control.

The US is still running substantial budget deficits, while China’s government has recently pumped funds into the economy in an effort to support weak growth.

The IMF confirmed the world’s two largest economies were driving the global rise, in findings published this week. But in prepared remarks Georgieva also highlighted a “frightening evolution” in emerging and low-income countries, as more government income is set aside to honour debt-servicing commitments.

Georgieva said governments needed to lower debt and rebuild fiscal buffers to cope with potential economic shocks — something the managing director said “will surely come, and maybe sooner than we expect”.

Separate IMF research showed that discourse from politicians “increasingly favours fiscal expansion” rather than contraction, Georgieva said, increasing the hurdles to reining in debt.

A paper covering 65 countries and drawing on more than 4,500 manifestos from 1960 to 2022 points to a proliferation of policy proposals that tend to expand government spending. 

The share of discourse pointing to a fiscal expansion has increased 40 per cent across both advanced and emerging economies over the past three decades. Political discourse focusing on fiscal “restraint” had more than halved since its 1980s peak in advanced economies, the paper said.

“Even the traditionally fiscally conservative political parties are developing a taste for borrow-to-spend,” Georgieva said.

The US presidential election next month has been characterised by campaign pledges that point to increasing largesse on both sides of the political spectrum. The national debt stands at 99 per cent of GDP and, according to the Congressional Budget Office, is poised to surpass historical records and hit 125 per cent 10 years from now, if there are no changes to current laws. 

The Committee for a Responsible Federal Budget, a non-partisan group, found this month that if Donald Trump wins the election the debt-to-GDP ratio would rise 17 percentage points to 142 per cent of output by the middle of the next decade. The Republican nominee’s pledges to lower taxes for individuals and businesses, alongside plans to impose hefty tariffs and deport millions of immigrants, lay behind the rise.

Under Kamala Harris, the Democratic challenger, that ratio would also increase, albeit by a lesser 8 percentage points to 133 per cent of GDP in 10 years. 

In her speech, Georgieva said there had been some good news, most notably the global retreat of inflation, which had not been accompanied by a recession. Both the US and euro area labour markets are “cooling in an orderly manner”. 

However, the once-in-a-generation inflationary shock a few years ago would have enduring effects on household incomes, Georgieva warned. This is on top of continued geopolitical tensions, including the worsening conflict in the Middle East. 

Growth, meanwhile, is set to be lacklustre, according to the IMF, which in July predicted a global expansion of 3.2 per cent in 2024 and 3.3 per cent in 2025.  

“Budgets need to be consolidated — credibly, yet gradually in most countries,” said Georgieva. “This will involve difficult choices on how to raise revenues and make spending more efficient, while also making sure that policy actions are well explained to earn the trust of the people.”