Top economies heading for biggest budget deficits since Covid, IMF warns

Bangkok, 13 October 2026 — The world’s largest economies are heading for their biggest budget deficits since the Covid era, the International Monetary Fund has warned, urging governments to take “urgent” action to rebuild public finances as sovereign borrowing costs climb to multidecade highs.

The warning, reported by the Financial Times from the IMF and World Bank annual meetings in Bangkok, lands at a delicate moment. Finance ministers and central bank governors from the Fund’s 191 member states have gathered in Thailand to confront a three-way squeeze: an energy supply shock from the Middle East conflict, a record overhang of public debt, and an AI investment boom that is propping up growth even as it inflates asset prices and strains credit markets.

The Fund’s message is blunt. After years of pledges to restore fiscal buffers once the pandemic emergency passed, governments have instead let deficits drift back toward crisis levels — this time without the excuse of an emergency.

The warning from Bangkok

IMF Managing Director Kristalina Georgieva has spent the past week laying the groundwork for this week’s fiscal broadside. In a speech in Singapore ahead of the Bangkok meetings, she described an economy pulled in two directions: a negative energy supply shock from the Middle East conflict and a positive demand shock from artificial intelligence that is also pushing up inflation. Record public debt, she argued, leaves governments dangerously exposed to both.

Ahead of the meetings, Georgieva told Reuters that advanced economies, led by the United States, carry some of the largest debt burdens relative to economic output anywhere in the world. She urged governments to establish credible medium-term plans to control deficits rather than relying on stronger economic growth alone to stabilise public finances — a clear signal that the Fund believes the AI boom will not bail treasuries out.

The numbers explain the urgency. The IMF projects that public debt in advanced economies will reach 115% of GDP by 2031, up from 108% in 2025. In emerging and developing economies, it is forecast to climb to 84% of GDP from 74%. Primary deficits in the largest economies remain substantially larger than before the pandemic, governments face higher real interest rates and shorter debt maturities, and mounting defence spending is adding fresh pressure on budgets already stretched by energy subsidies and interest bills.

The numbers behind the alarm

Several data points released around the Bangkok meetings show how far the fiscal picture has deteriorated:

• Debt ratios keep climbing. Global public debt is approaching its highest level since the Second World War and is on course to exceed 100% of global GDP — two years earlier than the IMF had previously expected, driven by rapid borrowing in the United States and China.
• Borrowing costs are at generational highs. Ten-year sovereign bond yields in the United States, Germany and Japan have reached their highest levels since 2007, 2009 and 1996 respectively, and continue to climb. Benchmark yields across advanced economies have hit multidecade highs as resurgent inflation, the expected path of policy rates and fiscal concerns push up borrowing costs.
• Oil is back near $100 a barrel. With impaired refining capacity adding roughly another $100 in crack-spread margins per barrel for key products such as diesel, Brent futures point to elevated prices through 2027 — a tax on every oil-importing treasury.
• Emerging markets face a refinancing wall. Developing economies face an estimated $400 billion in external debt payments in 2026, while interest payments already consume more than 10% of government revenue on average, according to Reuters.
• Inflation risk is rising again. The IMF’s models put the probability that global inflation exceeds 5% in 2027 at about 35%, up from 30% in April, with risks tilted to the downside.

Taken together, the figures describe governments borrowing at the scale of an emergency while facing financing conditions last seen a generation ago.

Why deficits never came down

The Covid pandemic forced governments everywhere to spend at wartime levels, and deficits duly exploded in 2020 and 2021. The plan, in theory, was for the emergency borrowing to unwind as economies recovered. Instead, a rolling sequence of shocks — supply-chain inflation, the war in Ukraine, the energy crisis, and now the Middle East conflict and its disruption of shipping through the Strait of Hormuz — gave treasuries a rolling excuse to keep spending.

What is new, the IMF argues, is that the deficits are now structural rather than cyclical. Even with the global economy still growing — the Fund raised its 2026 forecast to 3.1% from 3% in July, thanks largely to the AI-driven investment boom — primary deficits in the biggest economies have not meaningfully narrowed. Governments are running emergency-sized shortfalls in a growing economy, which means the debt ratios ratchet up with no downturn to blame.

Politics compounds the problem. Georgieva has acknowledged that fiscal consolidation is “very hard to square politically” when households are already squeezed by higher living costs and debt payments. Support for households facing higher energy and food costs should be kept “temporary, targeted and non-distortionary,” the Fund says — but temporary programmes have a habit of becoming permanent.

What it means for markets and borrowers

For investors, the IMF’s warning is a reminder that the bond market — not the stock market — is where fiscal stress first shows up. Rising sovereign yields lift borrowing costs across the entire economy: mortgages, corporate loans and government refinancing all get more expensive. Technology firms borrowing heavily to finance AI data centres are adding to the pressure, competing with governments for the same pool of savings.

That dynamic creates a feedback loop the Fund is keen to break. Bigger deficits mean more bond issuance; more issuance pushes yields higher; higher yields inflate interest bills, which widen deficits further. In the euro area, pressure is already mounting on heavily indebted members such as France and Italy. In emerging markets, countries dependent on foreign financing risk capital outflows as investors chase higher returns in major markets, adding pressure to exchange rates and domestic financing conditions.

For savers and borrowers trying to navigate this environment, the practical questions are immediate: what will my borrowing cost next year, and where does capital hold its value when sovereign balance sheets wobble? Rising government borrowing costs feed directly into everything from home loans to business credit — you can model the impact of higher rates on your own repayments with our loan and EMI calculator. And when confidence in government balance sheets falters, investors have historically reached for hard assets: keep an eye on live gold prices as the traditional hedge against fiscal and currency stress.

Can growth bail governments out?

The most tempting escape route — growing the economy fast enough that debt shrinks relative to output — is one the IMF explicitly rejects. Georgieva has warned that even an acceleration of growth, including one powered by artificial intelligence, will not solve the debt problem on its own. The Fund’s analysis puts numbers on that scepticism: in a scenario where AI productivity gains fail to materialise, US equities could fall 20% and global growth could end up 1.1 percentage points below baseline by 2028, with Asia 1.7 points lower.

The AI boom is itself part of the fiscal story. The IMF describes it as a “large, front-loaded demand shock” — massive investment pouring into semiconductors, data centres and power generation before any broad productivity gains have materialised. That investment has kept 2026 growth at 3.1% rather than collapsing under the energy shock, but it has also added to inflationary pressure and financial fragility. Just 32 countries now account for 95% of global growth, down from 54 in April, and the Fund has downgraded 47% of economies since its April forecasts.

The path the IMF prescribes is unglamorous: credible medium-term consolidation plans, protected growth spending, and shields for vulnerable households — delivered by governments that have spent the last six years discovering reasons not to. Whether Bangkok produces more than communiqués will determine if the “urgent” action the Fund demands arrives before the bond market demands it instead.

FAQs

Which countries are running the biggest budget deficits?

The IMF has singled out the world’s largest economies — led by the United States and China — where primary deficits remain substantially larger than before the pandemic. Georgieva told Reuters ahead of the Bangkok meetings that advanced economies, led by the US, carry some of the largest debt burdens relative to economic output. In aggregate, advanced-economy public debt is projected to hit 115% of GDP by 2031, up from 108% in 2025, while emerging and developing economies climb to 84% from 74%.

What does “rebuilding fiscal space” actually mean in practice?

It means governments giving themselves room to respond to the next crisis by getting deficits and debt onto a sustainable path now, during a period of growth. Concretely, the IMF wants credible medium-term consolidation plans rather than vague promises, and it wants support for households hit by energy and food costs kept temporary, targeted and non-distortionary. The measures must protect economic growth and vulnerable groups — the Fund is explicit that austerity that crushes growth defeats its own purpose.

Why can’t faster economic growth just shrink the debt on its own?

Because the maths no longer works without policy action. Real interest rates are higher than during the post-2008 era, debt maturities have shortened (so borrowing reprices faster), and defence spending is adding structural pressure. The IMF warns that even AI-driven growth won’t fix the problem alone, and its scenario analysis shows what happens if AI productivity disappoints: US equities down 20% and global growth 1.1 points below baseline by 2028. Growth helps, but the Fund’s message is that it is not a substitute for fiscal discipline.

How do government deficits affect ordinary borrowers and savers?

Through interest rates. When governments borrow heavily, they compete with households and businesses for savings, pushing up yields on everything from mortgages to corporate bonds. Higher sovereign yields also weaken currencies in emerging markets as capital flows toward safer, higher-yielding markets — which is why developing economies facing $400 billion in external debt payments in 2026 are under particular strain. Borrowers can model rate rises on their own finances with tools like our loan and EMI calculator.

What happens next — will the Bangkok meetings change anything?

The annual meetings produce the IMF’s flagship forecasts — the World Economic Outlook and Fiscal Monitor — which set the terms of debate, but binding action is up to national governments. Watch for whether major economies announce credible medium-term fiscal frameworks, how bond markets react to the Fund’s debt projections, and whether the AI investment boom keeps masking underlying weakness. The Fund’s own models give a 35% probability that global inflation tops 5% in 2027; if that materialises, central banks may have to tighten further, making every deficit more expensive to finance.