US-China tariff war to push global debt past pandemic levels – IMF

There are strong indications that the heightened uncertainty caused by the new US tariffs will push global public debt above pandemic-era levels to nearly 100 per cent of global Gross Domestic Product (GDP) by the end of the decade.

The International Monetary Fund (IMF) made this known in its Fiscal Monitor report released at the ongoing World Bank/IMF Spring meetings, adding that the situation could be exacerbated as slower growth and trade strain government budgets.

According to the Fiscal Monitor’s debt-at-risk, which utilises data up to December 2024, in a severely adverse scenario, global public debt could reach 117 per cent of GDP by 2027. The Fund said this would represent the highest level since World War II, exceeding reference projections by almost 20 percentage points.

Major policy shifts underway have heightened global uncertainty, the IMF said, noting that the series of recent tariff announcements by the United States, and countermeasures by other countries have increased financial market volatility, weakened growth prospects, and increased risks.

The developments come in the context of rising debt levels in many countries and already strained public finances, which in many cases will also need to accommodate new and permanent increases in spending, such as defense. Rising yields in major economies and widening spreads in emerging markets further complicate the fiscal landscape, it added.

“We project global public debt to increase by 2.8 percentage points this year—more than twice the estimates for 2024—pushing debt levels above 95 per cent of gross domestic product,” the fund said.

“This upward trend is likely to continue, with public debt nearing 100 percent of GDP by the end of the decade, surpassing pandemic levels. These numbers are based on the World Economic Outlook reference projections, reflecting tariff announcements made between Feb. 1 and April 4. Amid substantial policy uncertainty and a shifting economic landscape, debt levels could rise even further.”

Risks to the fiscal outlook have further intensified, the report said, noting that debt levels may rise even further than the debt-at-risk estimates if revenues and economic output decline more significantly than current forecasts due to increased tariffs and weakened growth prospects.

Additionally, escalating geoeconomic uncertainties could heighten debt risks, driving up public debt through increased expenditures, particularly in defense.

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“Demands for fiscal support could also rise for those vulnerable to severe disruptions from trade shocks, pushing up spending,” the fund said.

“The Fiscal Monitor estimates that a significant rise in geoeconomic uncertainty could lead to a public debt increase of approximately 4.5 percent of GDP in the medium term.”

The report said tighter and more volatile financial conditions in the United States may have ripple effects on emerging markets and developing economies, leading to higher financing costs.

This significantly impacts commodity prices, resulting in lower prices and heightened price volatility, the report said.

“Limited fiscal improvements may further heighten risks from rising interest rates, especially as many countries have substantial financing needs. High interest rates could limit essential spending on social programs and public investments.

“Additionally, reduced foreign aid, due to shifting priorities among advanced economies, complicates financing for low-income countries.”