In the midst of greater uncertainty, policy formulators must deal with complex compensation between debt, slower growth and new expenditure pressures.
The main changes in the policy in progress have increased global uncertainty. The series of recent tariff announcements by the United States and the countermeasures of other countries have increased financial market volatility, weakened growth prospects and the highest risk. They come in the context of the increase in debt levels in many countries and have already tense public finances, which in many cases must also accommodate new and permanent increases in spending, such as defense. The increase in yields in the main economies and the extension of differentials in emerging markets further complicate fiscal landscape.
We project the global public debt to increase by 2.8 percentage points this year, more than twice the estimates by 2024, which supports debt levels greater than 95 percent of the gross domestic product. It is likely that this upward trend will continue, with a public debt that approaches 100 percent of GDP for the end of the decade, exceeding pandemic levels.
These numbers are based on the reference projections of world economic perspectives, which reflects the fees made between February 1 and April 4. Amid a substantial policy uncertainty and a changing economic scene, debt levels could increase even more.
In this environment, the fiscal policy faces critical compensation: to balance the reduction of the debt, build shock absorbers and meet the needs of urgent expenses in the midst of weaker growth perspectives and higher financial costs. Navigating these complexities will be essential to encourage stability and growth.
Risk of greater debt
Debt risks were already high. According to the risk debt of the fiscal monitor, which uses data until December 2024, in a severely adverse scenario, the global public debt could reach 117 percent of GDP by 2027. This would represent the highest level since World War II, exceeding reference projections in almost 20 percentage points.
The risks to the fiscal perspective have intensified even more. Debt levels may increase even more than estimates of debt at risk if income and economic production decrease more significantly than current forecasts due to the increase in rates and weakened growth prospects. In addition, the growing geoeconomic uncertainties could increase debt risks, which increases public debt through higher expenses, particularly in defense. Fiscal support demands could also increase for those vulnerable to serious interruptions of commercial shocks, which increases spending. The fiscal monitor estimates that a significant increase in geoeconomic uncertainty could lead to an increase in public debt of approximately 4.5 percent of GDP in the medium term.
The most tight and more volatile financial conditions in the United States can have dominant effects on emerging markets and developing economies, leading to greater financial costs. This significantly affects the prices of basic products, resulting in lower prices and greater pricing volatility. Limited tax improvements can further increase the risks of increasing interest rates, especially since many countries have substantial financing needs. High interest rates could limit essential spending on social programs and public investments. In addition, reduced foreign aid, due to changing priorities between advanced economies, complicates financing for low -income countries.
Complex Policies
In an uncertain world that changes rapidly, countries must put their own fiscal home in order. This means implementing prudent policies within robust fiscal frameworks to develop public trust and help reduce uncertainty.
The fiscal policy must prioritize the reduction of public debt and establish and expand the shock absorbers to address expenses and economic shocks. This means finding the right balance between adjustment and support for economic growth, adapted to the unique situation of each country, available resources and general economic conditions.
Countries with limited space in government budgets must implement gradual and credible consolidation plans and allow automatic stabilizers, such as unemployment benefits, function effectively. Any new need for spending should be compensated through expenses of expenses in other places or new income. For countries with greater fiscal flexibility, it is important to use the resources available judiciously within well -defined medium -term plans. Fiscal support for companies and communities affected by severe commercial dislocations must be temporary and directed, with a strong emphasis on transparency and effective cost management.
In more general terms, advanced economies should address problems related to aging populations by appropriating spending, advancing in pension and medical care reforms, and expanding the tax base. In emerging and developing economies, improving the fiscal system is crucial due to historically low income. Low -income developing countries must maintain the course of fiscal adjustments given the financing challenges. The restructuring of the timely and ordered debt together with such adjustments is essential for countries that face debt anguish.
In addition, fiscal policy, together with other structural policies, should focus on improving potential growth. This can help relieve challenging compensations between the growth and sustainability of debt. For example, well -designed pensions and energy subsidies can generate savings that can be used to support social programs and infrastructure investments.
As significant policy changes and the greatest uncertainty remodel the global economic landscape, the fiscal perspective has worsened. To effectively navigate these challenges, governments must focus on the construction of public confidence, guarantee fair taxes and wisely manage resources. In doing so, they can encourage resilience and promote sustainable growth in uncertain times.
– This blog is based on Chapter 1 of the April 2025 fiscal monitor, “fiscal policy under uncertainty.”