Global debt has reached a record level of $315 trillion ($250 trillion pounds), according to data from the Institute of International Finance (IIF). The indicator rose due to increased borrowing by China, India, and Mexico. In just the first quarter, global debt increased by $1.3 trillion.

As noted in its report, the IIF states that governments are cutting taxes and increasing spending against the backdrop of a record number of elections this year. “Given the stubborn inflation in the United States and the expected delay in the Federal Reserve’s interest rate cuts, a dollar rally… could again bring to the fore problems with government debt, especially for developing countries,” the IIF report said.

The IIF report states that budget deficits are still higher than before the coronavirus pandemic. According to forecasts, this year’s budget deficit will increase global debt by $5.3 trillion.

As noted by the IIF, China has already faced a real estate crisis, which threatens to slow the country’s economic growth for many years. Earlier, the International Monetary Fund (IMF) warned that by the end of the decade, India’s debt could exceed the size of its economy as it spends billions of pounds annually on disaster relief.

IIF experts warned that “growing trade disagreements and deeper geo-economic fragmentation could reduce the ability of developing markets to service external debt,” as many developing countries struggle with high dollar-denominated debts.

“While relatively optimistic short-term prospects for the global economy are a positive factor for debt dynamics, sustained inflation, especially in the United States, continues to pose significant risks, exerting upward pressure on global financing costs,” the report said.

According to the IMF’s April Budget Bulletin, global debt reached 93.2% of global GDP in 2023. Experts expect this figure to rise to 93.8% in 2024, 95.1% in 2025, and 98.8% in 2029 due to the growth of US and Chinese government debt.

In particular, the IMF notes a noticeable increase in debt in the United States and China. The size of global government debt reached 93.2% of global GDP at the end of 2023, according to the IMF’s fiscal policy report. This is 2 percentage points higher than the 2022 figure and 9 points higher than in 2019. The largest contribution to the increase in total debt was made by the United States and China. According to the IMF’s forecast, maintaining current approaches to tax and budget policy will double the debt of these countries by 2053. The significant increase in debt in the United States and China will also have a serious impact on the economies of other countries.

These estimates explain the IMF’s forecast for global debt – the organization expects it to reach 99% of GDP in five years.

The IMF is concerned that the soft tax and budget policy in the United States will hinder a rapid slowdown in inflation in this country to the target 2%. Recall that in March, despite the Fed’s continued tight monetary policy, inflation in the United States accelerated to a six-month high of 3.5%. The projected high volatility of US government bonds could create problems for the global financial system, analysts believe, significantly increasing risks for the global financial system.

The IMF is also concerned about the Chinese scenario of expanding government debt volumes. The contraction of the real estate sector in this country creates an additional financial burden on local authorities, which continue to actively issue bonds for the construction of various infrastructure facilities. Global risks may arise from the intensification of problems with regional debt in China, which will require authorities to tighten fiscal discipline and lead to slower economic growth than is currently expected. Such a development could potentially lead to a reduction in global trade volumes, as well as a reduction in China’s investments in other developing countries, the IMF believes.

According to the organization’s estimates, the “budgetary window of opportunity” for states in the coming years will narrow: the need for additional spending (in particular, on energy transition) will only increase, interest rates will remain at sufficiently high levels, and the growth prospects of leading economies will deteriorate. In this regard, the stability of other economies in the IMF is increasingly tied to the pace of budget consolidation in China and the United States.

Source: IIF – Global Debt Monitor: Navigating the New Normal