The International Monetary Fund urged governments to cut deficits, warning that climbing bond yields are lifting borrowing costs as public debt nears 100% of GDP, a post-World War II high.
Key Points:
- The IMF said the G7's average 10-year bond yield rose more than 110 basis points between February and September.
- U.S. interest payments are projected to top 5% of GDP by 2031, roughly matching Social Security spending.
- Fund officials warned that delaying fiscal consolidation will only make the eventual adjustment more painful.
IMF Debt Warning
The fund urged advanced economies and others on Wednesday to reduce spending, cut deficits and lower debt levels, warning that delays would only make the job harder.
Rodrigo Valdes, who heads the fund's fiscal affairs department, and his deputy Era Dabla-Norris wrote in a blog post that higher borrowing costs make credible consolidation more urgent. Officials are gathering in Bangkok this week for the IMF and World Bank annual meetings.
The G7's average 10-year government bond yield climbed more than 110 basis points between February and September, its highest level in nearly two decades, the IMF said. High oil prices, persistent inflation, stronger investment demand and higher-than-expected AI growth drove the move.
Government financing costs are projected to average 3.7% by 2031, up from 2.3% in 2021. In the U.S., interest payments are expected to top 5% of GDP by 2031, up from 2.8% before the pandemic and roughly equal to projected Social Security spending. In low-income countries, interest payments already eat up more than 15% of tax revenue, compared with an average of about 9% between 2011 and 2019.
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Valdes Urges Consolidation
In an interview, Valdes said fiscal results this year were worse than expected six months ago and worse than they were a year ago. Most countries, he said, are now looking to spend more, not less.
Valdes put it plainly: "There's no way out of the fiscal dynamics here."
Dabla-Norris said countries "need to act now, particularly if you have high levels of debt," to make room for rising spending on defense and aging populations.
Rich economies are also refinancing more debt at shorter maturities, so higher rates reach budgets faster, and close to 30% of G7 and Spanish debt now comes due within a year. Inflation above target means central banks will likely keep rates high, the IMF said.
The warning builds on the fund's April Fiscal Monitor, which projected global public debt would reach 100% of GDP by 2029, a year earlier than it had forecast in 2025. That report put debt at just under 94% of GDP in 2025 and flagged the erosion of the U.S. Treasury's safety premium as a growing risk.
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