Rising Interest Rates Challenge Long-Standing Pro-Debt Economic Policies

Over the last decade, many economists have promoted the use of debt to finance government spending, dismissing concerns about potential debt overhangs as advanced economies enjoyed low interest rates. However, the past two years have seen a significant shift in this perspective due to rising inflation and a return to normal long-term real interest rates. A recent reassessment by senior IMF economists highlights that with average debt-to-income ratios in advanced economies projected to rise to 120% of GDP by 2028 and higher borrowing costs becoming the norm, there is a pressing need for these nations to rebuild fiscal buffers and ensure the sustainability of their debt.