IMF urges action on debt before higher interest costs force a harsher adjustment

The International Monetary Fund urged governments Wednesday to act before the rising cost of debt forces them into a more painful adjustment. Its warning brings together three pressures already competing for space in public budgets: high debt, higher interest costs and growing demands for spending.

Rodrigo Valdés, director of the IMF's Fiscal Affairs Department, said the response remained inadequate in many countries. The institution argues that major advanced economies need to rebuild room to maneuver and that their decisions have consequences beyond their borders. The call comes during the annual meetings of the IMF and World Bank in Bangkok.

Managing Director Kristalina Georgieva directed part of that message at the United States. According to Associated Press, she said U.S. authorities recognized the deficit and debt problem and warned that economic growth, while helpful, could not resolve it quickly enough.

Interest payments take a larger share

Debt becomes harder to manage when financing it costs more. Existing borrowing does not all become more expensive immediately: some debt was issued at fixed rates and matures later. But when governments refinance bonds or raise new money, they face current market conditions.

Reuters reported an IMF estimate projecting that governments' average effective financing cost would rise from 2.3% in 2021 to 3.7% in 2031. This is a forecast, not the rate every government pays today or a figure that applies to every bond.

The agency also reported that the average yield on 10-year government bonds in the Group of Seven increased by more than 110 basis points between February and September, equivalent to more than 1.1 percentage points. It reached its highest level in almost two decades, according to the analysis cited.

The budget implications are straightforward: more money going to interest leaves less for other uses unless revenue or borrowing increases. The harder question is how to distribute that pressure among taxpayers, public services and investment.

The burden extends beyond wealthy countries

The consequences reach countries that did not take part in the spending decisions of the largest economies. Georgieva warned that debt pressure was particularly severe for low-income countries, according to Associated Press.

That vulnerability is visible in their interest bills. Figures reported by Reuters show interest payments now absorbing more than 15% of tax revenue in low-income countries, compared with an average of around 9% between 2011 and 2019. Each payment narrows an already limited capacity to respond.

The October fiscal analysis puts global public debt at historically high levels and projects it will exceed 100% of world gross domestic product before 2030. That describes an aggregate trajectory. It does not mean every country has the same debt burden or that a crisis is inevitable on a particular date.

Repairing public finances without weakening growth

The October analysis examines ways to improve revenue collection without holding back investment, employment and productivity. It does not prescribe a universal mix of taxes: policy design needs to reflect each country's circumstances.

One approach is to prevent value-added tax from accumulating as a production cost when businesses cannot fully recover tax paid on their inputs. Another is to review tax advantages that steer investment away from more productive uses.

The chapter also considers work incentives, support for innovation and tax administration. That matters for the political debate: the effects of a fiscal adjustment depend on its design, not just on the amount of revenue it raises.

The cost of protecting households and businesses

Energy adds another complication. In an analysis published in June, the IMF had identified nearly 900 measures adopted in about 170 countries since the start of the war in the Middle East. That was the count at the time, not an October update. Many measures limited the pass-through of higher costs to consumers and businesses.

The institution warned that assistance initially described as temporary could be extended without a clear end date. Broad subsidies and sustained tax reductions can consume resources that may be needed in the next crisis.

Valdés reiterated Wednesday that assistance should focus on those who need it and be limited, temporary and transparent. The IMF argues that broadly shielding prices can delay adjustment to reduced supply and place further strain on public finances.

The alternative does not eliminate the social cost. In its May analysis of energy and food, the Fund emphasized that poorer households spend a larger share of their income on these essentials and have less savings. It therefore favors targeted support for vulnerable families and liquidity assistance for viable businesses.

Governments face the task of turning those recommendations into decisions that are sustainable and socially defensible. The IMF wants them to act while they can still choose the pace and substance of the adjustment. Waiting until markets impose the terms, it warns, narrows their options just when they need them most.