IMF Sees Soaring Debt, but Stable at 100% GDP

Massive government spending to counter the COVID-19 pandemic will push public debt to nearly 100% of global economic output this year. But if growth rebounds next year, the run-up may be a one-off event, according to the International Monetary Fund on Wednesday.

In its latest Fiscal Monitor, the IMF said it anticipates government budget deficits to grow to 12.7% of GDP. That will be from 3.9% in 2020,  a nearly 9 percentage point difference.

IMF Fiscal Affairs Director Vitor Gaspar said what they see is a one-off, jump-up of debt in 2020. Then stabilization after 2021and even a slight downward trend in 2025.

Public debt will stay elevated at about 100% of GDP.  He said the resumption of economic growth and extremely low interest rates will help ease primary budget deficits.

Between interest rates and growth, the difference is not only negative. But more negative in their projections than it was before COVID-19. So low-interest rates play an important role in debt dynamics, Gaspar added. 

The IMF urged governments to take advantage of low rates to take a position in infrastructure. That was in another Fiscal Monitor chapter released last week.

It said an increase in public infrastructure investment of 1% of GDP could raise output by 2.7%. That would create 20 million to 33 million jobs.

Budget Fiscal Outlooks

The International Monetary Fund said there was wide divergence among the fiscal outlooks for IMF members. Advanced economies are taking on the biggest increase in debt burdens. Poorer developing countries face a tougher task of recovering from economic damage as more people fall into poverty.

Furthermore, the IMF said advanced countries will see budget deficits growing by 11% of GDP.  That is, with the U.S. jumping 11 percentage points to 18.7% of GDP and Canada’s rising to 20%. 

Emerging markets have fewer resources. They will see their deficits double as a share of GDP to about 11%.

The Fund also said its estimates were subject to “sizable fiscal risks”. Risk or risks are from a longer pandemic and recession that deteriorate balance sheets and increase bankruptcies. They also prompt abrupt commodity price movements and tighter financial conditions.