By Paul Hannon
The U.S. and China are set to drive a sharp rise in government debt over the remainder of this decade, while a prolonged conflict in the Middle East could see an even larger buildup, the International Monetary Fund said Wednesday.
In a twice-yearly report on government budgets, the Fund said debts are likely to match the annual output of the global economy by 2029, a year earlier than previously forecast. That level has only previously been reached in the aftermath of World War II.
The Fund said debts could hit 117% of global gross domestic product by that year in adverse circumstances, and 121% if the war were to be prolonged.
"The conflict in the Middle East could further strain government finances through higher food and fuel prices, tighter financial conditions, lower activity, and rising defense outlays," the Fund said.
While many governments will see their debts rise over coming years, the U.S. and China are set to be largely responsible for the rise in global debt from 93.9% of GDP in 2025.
According to the Fund's forecasts, the U.S. government's gross debt will likely hit 135.5% of annual economic output in 2029, up from 123.9% last year. To halt the rise in debt, the Fund's economists said tax rises will be needed, as well as the removal of tax breaks and cuts in spending.
"This underscores the importance of broadening the country's tax base, reducing tax expenditures, and addressing the long-term pressures stemming from Social Security and Medicare," the Fund said.
However, it added that there is "no debt consolidation plan in sight" as annual gaps between spending and revenues are set to range between 7% and 8% of GDP.
"These sustained deficit levels would be unprecedented in peacetime," the Fund said.
The Fund expects interest payments on the fast-growing debt to near 5% of GDP by 2030 from 4.3% last year. However, that assumes unchanged long-term interest rates.
"Should high debt and large deficits place upward pressure on long-term interest rates, borrowing costs could rise more than projected, leading to an even weaker fiscal trajectory," the Fund said.
Excluding the U.S., the debts of governments in advanced economies are set to fall slightly, to 93.9% of GDP in 2029 from 95.3% in 2025. The Fund said the U.K. "recorded a notable improvement" in its budget deficit by raising taxes, while Canada and Japan have made progress by restraining spending.
Indeed, the Fund forecast that the Japanese government's debt will fall to 195.7% of GDP in 2029 from 206.5% last year, reflecting a combination of the low interest rate it pays on bonds issued during the long period of deflation, and the pickup in economic growth and inflation over recent years.
"The outlook could become less favorable, however, because Japanese bond yields have risen to decade-high levels," the Fund said.
The Fund forecast that the combined debts of eurozone governments would rise to 89% of GDP in 2029 from 87.1% last year, but warned that policymakers face difficult choices as they ramp up spending on defense.
"Rising security outlays require explicit reprioritization within constrained envelopes to avoid slippage," the Fund said. "To address demographic pressures, health and pension reforms cannot be deferred."
Alongside the U.S., China is expected to be the main driver of higher government debts. The Fund forecast that the government's accumulated borrowings will be equivalent to 120.3% of GDP in 2029, up from 99.2% last year.
"Scaling back poorly targeted industrial policies would help rebalance fiscal support toward households, lower fiscal costs, and raise productivity by reducing resource misallocation," the Fund said.
Excluding China, the debts of governments in developing economies are forecast to rise to 60.8% of GDP in 2029 from 57.5% last year. However, many of those economies are most likely to see big rises in their debts should the conflict in the Middle East be long-lasting.
"The impact would fall disproportionately on emerging market and developing economies," the Fund said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
04-15-26 0914ET
