The International Monetary Fund (IMF) has urged governments to bear down on profligate spending after it found government debt was on course to reach 100 per cent of global GDP within the next five years.
In its latest Fiscal Monitor report, the world’s pre-eminent financial institution sounded the alarm on developed and developing nations over-reliance on borrowing, warning it threatened “financial stability” if governments do not urgently curb their huge deficits.
“The persistence of spending above tax revenues will push debt to ever higher heights threatening sustainability and financial stability”, the report said. “Prioritising fiscal policy is essential to support debt sustainability and prepare fiscal buffers to use in case of severe adverse shocks including financial crisis. But while we do recognise that the fiscal equation is very hard to square politically, the time to prepare is now”.
Global government debt is on track to shoot past 100 per cent of the sum total of economic activity across the world by as soon as 2029, the IMF projected. It put a five per cent likelihood that global debt could top 120 per cent of global income in the same period, given the current trend is towards “debt accumulating even faster”.
The report namechecked the UK as one of several countries whose debt to GDP ratio — the difference between a nation’s annual economic output and total sovereign debt — would break the 100 per cent mark in the next five years. In doing so, the country would join the likes of Japan, France, Canada and the US whose debt levels have already eclipsed the unwanted milestone.
UK policymakers have struggled to stop runaway borrowing since the coronavirus pandemic caused all Western governments to run record deficits in a bid to keep their economies afloat. In 2024, the public sector spent 4.8 per cent more than it earned via taxes, leaving its fiscal policy beholden to volatile global debt markets that currently levy interest of more than five per cent on 10-year government bonds, known as gilts.
The country’s sharply rising debt pile — which now stands at more than £3 trillion — means the government now spends twice as much on interest payments to bondholders as it does on defence, making it effectively the third largest government department.
Excluding debt interest payments, the IMF added the UK economy was on track to operate at a budget surplus in three years, time, which would peak at 0.7 per cent of GDP by 2030. Despite that, the IMF’s deputy director for monetary and capital markets, Athanasios Vamvakidis, said that debt markets felt uneasy about the UK’s fiscal path.
“Clearly markets are concerned about the UK economy and we have seen more volatility in the UK compared to other advanced economies”, he said.
Speculation over the contents of next month’s UK autumn Budget has reached fever pitch and it’s only going to keep increasing. This is not idle curiosity, with businesses still adapting to the confidence-sapping and job-smothering fallout from last year’s Budget, there is now a genuine fear that what remains of UK’s economic resistance could be broken by the government’s need to fill a huge hole in the public finances.
A fresh report by economists at Barclays and the Institute of fiscal studies points out that while the chancellor Rachel Reeves is busy blaming Brexit, Liz Truss and “austerity” for the present mess, the situation is in fact largely “of her own making”.
Last week, Reeves conceded for the first time that tax rises are on the cards (making her look like the last person to realise) telling Sky News “we’re looking at tax and spending” while a prime minister’s office spokesperson refused to rule out increasing income tax or VAT, hikes to either of which would breach Labour government’s manifesto.
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