By Paul Hannon

Higher tariffs and heightened geopolitical tensions may push government debts to new highs over the coming years, making the need for policymakers to outline robust plans for containing the surge more pressing, the International Monetary Fund said Wednesday.

In its twice-yearly report on the outlook for government debt, the fund said total borrowings will likely rise above 95% of world economic output this year, and almost match global gross domestic product by the end of the decade.

"There is a sense of urgency," Vitor Gaspar, director of fiscal affairs at the IMF, said. "Ministers of finance must build trust, spend wisely, tax fairly and take the long view."

The U.S. and China--the world's largest economies--are expected to drive much of the increase in debt over coming years. The fund forecast that U.S. government debt will rise to 128.2% of annual economic output by 2030 from 120.8% in 2024, assuming no change in policies. In China, government debts are expected to rise to 116% of gross domestic product from 88.3%.

The fund expects a much more modest rise in eurozone government debt, to 92.9% of GDP from 87.7%.

It warned that in "a severely adverse scenario" global government debt could soar to 117% of global GDP by 2027, which would be the highest level since the end of World War II.

The higher tariffs announced by U.S. President Trump and the doubts about existing military alliances his policies have fostered make that outcome more likely.

"Escalating geo-economic uncertainties could heighten debt risks, driving up public debt through increased expenditures, particularly in defense," the IMF said. "Demands for fiscal support could also rise for those vulnerable to severe disruptions from trade shocks, pushing up spending."

Given the high levels of debt incurred by many governments, the IMF warned against providing overly generous support to businesses and regions that are badly affected by the economic shifts set in motion by tariff increases.

"Fiscal support for businesses and communities impacted by severe trade dislocations should be both temporary and targeted," it said.

The fund said governments that already have high levels of spending should try to cut down other programs to offset new expenditures on defense or help for those harmed by the tariff increases, or raise taxes.

It urged all governments to try to cut their debts, which have risen sharply over recent years. Many governments borrowed heavily to help households and businesses through the Covid-19 pandemic, while European countries also tried to cushion the blow from a surge in energy costs following Russia's full-scale invasion of Ukraine.

"In an uncertain and rapidly changing world, countries will need to first and foremost put their own fiscal house in order," the fund said. "This means implementing prudent policies within robust fiscal frameworks to build public confidence and help reduce uncertainty."

The IMF's warning was delivered during a period of high volatility in government bond markets, a sign of uncertainty about the outlook for the global economy.

Yields on U.S. Treasury bonds have risen since Trump's April 2 announcement of higher tariffs on imports from a wide range of trade partners, and debt securities issued by other governments have followed, although to varying degrees.

The fund said volatility in the Treasury bond markets is a problem for many poorer countries, since it is likely to raise their borrowing costs as interest rates around the world are set with reference to what is considered to be the safest asset.

"Tighter and more volatile financial conditions in the United States may have ripple effects on emerging markets and developing economies, leading to higher financing costs," it said.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

April 23, 2025 10:03 ET (14:03 GMT)

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