IMF warns advanced economies face widest budget deficits since pandemic era

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IMF warns on budget deficits

Highlights

IMF projects advanced economies' net borrowing to reach 5.2% of GDP in 2024, the highest deficit level since 2021 pandemic lockdowns.
U.S. general government net borrowing is set to rise to 8.5% of GDP in 2024, with both U.S. and China expected to hit or exceed 8% by 2026.
Despite rising deficits and public debt nearing 100% of GDP later this decade, IMF upgrades 2024 world GDP growth forecast by 0.1 point to 3.1%.

IMF forecasts sharper fiscal deterioration

As reported by Financial Times, citing the IMF in its World Economic Outlook published on Tuesday, government net borrowing by advanced economies is expected to reach 5.2% of GDP this year, the highest level since 2021, when pandemic lockdowns were still weighing on the global economy.

The fund says the outlook has worsened since its April report, with deficits in both China and the U.S. set to hit or exceed 8% of GDP in 2026. It says the projections come after months of turmoil in global debt markets, where yields rise as investors respond to growing public debt, inflation concerns and increasingly aggressive funding demands linked to AI investment.

The IMF says rebuilding fiscal space is urgent because debt remains elevated, borrowing costs are higher, demands on public budgets are multiplying and uncertainty is increasing. It adds that its U.S. measure, which includes state and local government borrowing alongside federal spending, is higher than some other national estimates.

Debt markets and policy pressures intensify

Borrowing costs for governments have climbed to multi-decade highs as high energy prices and resilient growth lead central banks to step back from plans to lower policy rates. Central banks in the U.S., the Eurozone and Japan are among those raising interest rates this year, adding to budget pressure as debt-servicing costs increase.

The sell-off in debt markets worsens in September, according to the IMF's assessment, pushing interest costs higher and tightening fiscal conditions further. In the U.S., general government net borrowing is on track to reach 8.5% of GDP this year, up from 7.1% in 2025 and 5.8% before the pandemic.

Despite the fiscal warning, the IMF says the global economy remains relatively resilient in the face of the oil shock, helped in part by an AI-driven investment boom. It marginally upgrades its forecast for world GDP growth by 0.1 percentage point to 3.1% this year and expects the global economy to expand by 3.4% in 2027, even as public debt moves toward 100% of GDP later this decade.

In our earlier article on BlackRock’s shift in bond allocation amid surging sovereign yields, we described how the firm turned more constructive on short-term U.S. Treasuries and moved long-dated U.S. debt to neutral as yields hit multi-decade highs. We also noted that the move went alongside a more cautious stance on risk assets, highlighting how higher rates are resetting cross-asset preferences across major investors.

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