Global Debt Alarm, OECD and IMF Warn of Mounting Fiscal Risks in Advanced Economies

Global Debt Alarm, OECD and IMF Warn of Mounting Fiscal Risks in Advanced Economies

Why in News

The OECD’s Global Debt Report 2025 and the IMF’s recent observations have raised serious concerns over the unsustainable levels of debt across advanced economies. With sovereign debt in OECD countries expected to reach unprecedented levels and central banks stepping back from bond markets, the financial system faces increasingly volatile conditions.

Introduction

The world is staring at an impending debt crisis, with OECD countries projected to hit record-high levels of sovereign debt and a dangerous reliance on foreign investors. The Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) have flagged deep structural vulnerabilities, comparing the situation to a “cliff-hanging pulp thriller.” The combination of ageing populations, reduced central bank involvement, and political fragility is fueling fiscal anxiety, especially in developed economies.

Key Issues and Background

• OECD Sovereign Debt Surge: Sovereign debt in OECD countries has ballooned from $5 trillion before the 2007 Global Financial Crisis to $15.7 trillion in 2024. The figure is expected to touch $17 trillion by 2025, up from $14 trillion in 2023.

• Corporate and Pension System Shifts: In Western economies, employees increasingly use defined contribution pension schemes, reducing traditional pension funds’ investment in government bonds. This shifts the burden of debt financing to foreign investors—now holding more than a third of many developed nations’ debt.

• Global Financial Fragmentation: Many economies are now witnessing increasing difficulty in refinancing maturing debt due to rising interest rates post the low-rate issuance era. Developed economies are exposed to these risks far more than emerging ones.

• Political and Social Instability: Governments are under strain, as seen in the UK, where Labour’s rollback of planned welfare reform led to political backlash and market turbulence. Populist and far-right parties in several countries exploit social media to rally against immigration and welfare cuts, further straining fiscal agendas.

Specific Impacts or Effects

• UK and IMF Warnings: The IMF warned the UK that despite bringing down its fiscal deficit, structural problems remain. It called for reductions in pension and NHS subsidies, making healthcare costlier for high-income individuals.

• Japan’s Struggles: Japan, the last major economy to end quantitative easing, now sees weakened demand for government bonds, forcing the Bank of Japan to intervene. Yield increases and uncertainty are shaking both domestic and foreign investors.

• Corporatization and Risk: The IMF highlights that excessive financialization—corporate buyouts, share buybacks, and the weakening link between borrowing and investment—now threatens refinancing operations. Many corporations have taken on massive debt during the low-interest period and may struggle to refinance at current rates.

• Aging Populations and Fiscal Pressure: With rising healthcare and pension costs, advanced economies like the UK and Japan face ballooning welfare expenses. Their demographic profile limits flexibility in reducing expenditures.

Challenges and the Way Forward

1. Rising Interest Rates: A large volume of bonds issued during low-rate periods now requires refinancing at much higher rates, escalating debt servicing burdens.

2. Foreign Dependence: Developed nations must reduce dependence on foreign investment to finance public debt, especially given global geopolitical uncertainties.

3. Structural Reforms: The OECD and IMF advise urgent reforms in:

   • Labour markets

   • Education and competition

   • Adoption of AI and technology

   • Taxation, especially on high earners

   • Streamlining public spending

4. Political Leadership: Sensible economic policy must be upheld against populist resistance. Short-term gains cannot override long-term stability.

5. Corporate Reorientation: There is a need to realign corporate financing with productive investments rather than stock buybacks and debt-fueled acquisitions.

Conclusion

The Global Debt Report 2025 by the OECD and the IMF’s fiscal assessments act as a wake-up call for global policymakers. With developed economies skating on thin ice—burdened by excessive debt, ageing demographics, and limited fiscal room—there is a pressing need for coordinated global action. As low-interest-rate debt matures, the world may enter an era of costly refinancing and heightened fiscal stress. Unless corrective action is taken, the cliffhanger may very well end in a fall. The crisis, as noted, lies not in the stars but in ourselves.

5 Important Questions and Answers

1. What is the main concern raised by the OECD’s Global Debt Report 2025?
It warns of the unsustainable rise in sovereign debt among OECD nations, projecting $17 trillion in 2025, and increasing reliance on foreign investors.

2. Why are central banks no longer buying as many government bonds?
Many, like the Bank of Japan, have ended quantitative easing policies. This has reduced their market participation, leaving gaps in demand for government debt.

3. How do ageing populations contribute to fiscal challenges?
They increase pension and healthcare spending, straining public finances and reducing the scope for welfare cuts or investment.

4. What corporate behavior has been flagged by the IMF as problematic?
Corporations are using borrowed money for buybacks and shareholder payouts instead of investment, making refinancing harder under high interest rates.

5. What steps can be taken to mitigate the debt crisis?
Structural reforms in labor, education, fiscal policies, and technological innovation are key. Governments must reduce overdependence on foreign capital and enhance domestic investment efficiency.