The International Monetary Fund (IMF) warned during its Fiscal Monitor press briefing at the IMF 2025 Annual Meeting that rising interest rates, geopolitical pressures, and persistent deficits are straining public finances. Vitor Gaspar, Director of the Fiscal Affairs Department at IMF, cautioned governments to act early to protect stability.
“Global public debt is projected to rise above 100% of GDP by 2029. In such a scenario, public debt would be at its highest level since 1948. Moreover, the distribution of risks is tilted towards debt accumulating even faster. With a 5% risk, debt would reach 124% in 2029. The world public debt landscape is very diverse. This map displays the fund's fiscal risk assessment based on the latest debt sustainability framework from Article IV staff reports. Countries differ widely in their deficit and debt levels. Many major economies have public debt greater or projected to grow over 100% of GDP. Among the G-20, these are Canada, China, France, Italy, Japan, the UK and the US. These countries typically have deep and liquid sovereign bond markets and often broad policy choices, resulting in their fiscal risk ratings being moderate (yellow), or low (green),” explained Gaspar.
Because countries with credible institutions and sound public finance systems are better equipped to manage higher debt levels, governments should focus on building robust fiscal frameworks that can maintain market confidence even in periods of stress. Weak fiscal governance and limited financing capacity, Gaspar warned, can leave emerging and low-income countries far more exposed to sudden financial or economic disruptions.
“In contrast, many emerging markets and low-income countries face tougher fiscal challenges, despite their debt, often below 60% of GDP. Their policy options and funding access are limited. As the map shows, 55 countries are assessed at high (pink) or distressed level (red) of fiscal risk. In many cases, relatively low debt-to-GDP ratios are accompanied by low debt tolerance,” Gaspar said.
With fiscal space tightening, the way governments spend is becoming as critical as how much they spend. By channeling limited resources into growth-enhancing areas like education and infrastructure, and by tackling corruption and procurement inefficiencies, governments can stretch budgets further and magnify the impact of investments – especially in larger economies.
“Beyond the present, fiscal risks loom large. Public debt dynamics have drastically changed in recent years. It's not only the size of debt, but also the cost. From the global financial crisis, through to the COVID period, ever-lower interest rates accompanied rising debts, leading to an overall stable interest bill on budget. However, the situation is now starkly different; interest rate increases have raised funding costs and strained budgets. Indeed, increased spending is estimated to increase to 2.9% of GDP in 2025 from 2% in 2020, and is projected to continue to rise to the end of the decade,” said Gaspar.
With fiscal pressures growing and external funding declining in many developing economies, governments need to expand domestic fiscal space; that includes strengthening tax administration, rationalizing subsidies, broadening the revenue base, and adopting digital tools. Sustaining tax-to-GDP ratios above 15% can support long-term development.
“Starting from two high deficits and debt, the persistence of spending above tax revenues will push debt to ever high heights, threatening sustainability and financial stability. So, prioritizing fiscal policy is essential to support debt sustainability and prepare fiscal buffers to use in case of severe adverse shocks, including financial crisis. But while we do recognize that the fiscal equation is very hard to square politically, the time to prepare is now. Improving growth prospects and enhancing public trust in government help balance the fiscal equation,” advised Gaspar.
Mounting fiscal pressures are colliding with a risk-prone global environment, where higher interest rates, stretched asset valuations, and geopolitical tensions could trigger financial or economic shocks that strain public finances. Countries with stronger fiscal buffers are better positioned to respond quickly and limit the damage, recovering faster from crises. Rising defense costs in some regions and fiscal adjustments in others highlight how politically difficult consolidation can be – but the costs of delay are likely to be higher.
“What we urge is governments to prepare in advance. Research that we conducted some years ago shows that countries that enter a financial crisis with sound fiscal buffers can, in a sense, support the economy and the financial system in the context of the crisis and, therefore, the costs on economic activity and employment are less, and the recovery comes faster,” explained Gaspar.
