Global Debt Challenges: Navigating Fiscal Policy Amid Economic Uncertainty

Amid escalating global uncertainty, governments face tough choices in balancing rising public debt with economic growth and urgent spending needs. The recent surge in tariffs and countermeasures has compounded the situation, intensifying market volatility and weakening growth prospects. These changes come at a time when public debt is already increasing, with many nations needing to adjust to new, permanent spending pressures, including defense costs. The World Economic Outlook projects a significant rise in global public debt, reaching over 95% of GDP this year, and approaching 100% by the end of the decade.

This upward trajectory of debt poses a serious concern, especially with fiscal risks looming. The latest Fiscal Monitor warns that, under a severe scenario, global public debt could exceed 117% of GDP by 2027—its highest level since World War II. The growing risks stem from multiple factors, including deteriorating economic output, higher tariffs, and geopolitical tensions. As governments face mounting pressures to increase defense and support vulnerable populations, they must also contend with tighter financial conditions and rising borrowing costs, especially in emerging markets.

To address these challenges, policymakers must adopt prudent fiscal policies, reducing debt while bolstering financial buffers to manage potential shocks. A balanced approach is needed, where countries with fiscal flexibility should deploy resources carefully, while those with limited room must adopt gradual consolidation plans. Tailored strategies for each country are essential, ensuring that any new spending is offset by cuts or new revenue sources. For low-income countries, particularly, fiscal adjustments and orderly debt restructuring remain critical to long-term sustainability.

The focus on fiscal discipline is complemented by structural reforms to boost potential growth. Advanced economies should prioritize reforms to address aging populations, while emerging economies must strengthen tax systems to increase revenues. By navigating these complex policy trade-offs, governments can foster public trust and resilience, ultimately ensuring stability and sustainable growth amidst the uncertainty of global markets.

Source: Tribune