IMF dials up calls for urgent fiscal consolidation

The International Monetary Fund has intensified its calls for advanced economies and others to implement urgent fiscal consolidation measures. Rodrigo Valdes, head of the IMF's Fiscal Affairs department, warned that delays would only exacerbate fiscal pressures in the years to come. Rising sovereign bond yields are adding to the fiscal challenges, with average public debt projected to reach 100% of gross domestic product, the highest since World War Two.

Valdes emphasized that the urgency of the message has been increased due to changing conditions, such as inflationary pressures, high global debt levels, and soaring sovereign bond yields. He pointed out that many countries are now prioritizing spending increases over fiscal tightening, which further complicates the situation. The IMF stressed the importance of building political support for concrete plans to contain borrowing costs in the medium term and limit spillovers to the global economy.

Failure to act promptly would result in increasing interest burdens, fiscal vulnerabilities, and limited policy options. Low-income countries, already facing tighter external financing, need to strengthen their tax systems and improve spending efficiency. High oil prices, persistent inflation, stronger investment demand, and higher-than-expected AI growth have contributed to sharp increases in long-term sovereign yields, with the G7's average 10-year government bond yield reaching its highest level in nearly two decades.

The IMF projects that the effective average cost of government financing will rise to 3.7% by 2031, up from 2.3% in 2021. In the US, interest payments are expected to reach 5.3% of GDP, nearly equal to its projected expenditure on Social Security. The IMF warned that the fiscal costs of measures to shield populations from high energy prices could amount to half a percent of global GDP, potentially driving prices higher worldwide.