Rising deficits draw attention as government spending needs pile up

The world's debt-to-GDP ratio ticked down in 2022 — largely thanks to the impact of inflation, which reduced the real value of debt as economic activity remained strong, according to the International Monetary Fund's 2023 Global Debt Monitor, unveiled last week.

The big picture: However, the IMF's economists see debt levels returning to the pre-pandemic growth trend — and some are starting to contemplate the political and market limitations of ever-expanding deficits.

By the numbers: Since the global financial crisis, public sector debt — i.e. government debt — has increased by nearly 30 percentage points relative to GDP.

• In nine of the 21 major developed economies, it surged by 45 points, said Joyce Chang, JPMorgan's chair of global research, speaking at an IMF event launching the latest debt report.

Why it matters: With interest costs ballooning, the discussion among global finance types is turning to the debt sustainability of advanced economies — not just that of frontier countries. The market's tolerance for deficit growth may eventually hit a wall, just as governments seek to fund a host of critical issues that will define the next decade.

• For example, climate spending needs are massive. Military spending needs may grow, given challenges from China.
• "And then, of course, there is inequality that's looming in all countries, and you need to have social spending to support the very poorest," Martin Mühleisen, a senior fellow at the Atlantic Council, tells Axios.
• At the event, Jeromin Zettelmeyer, director at policy research firm Bruegel and a former IMF deputy director, said, "My worry is that the main casualty of [rising deficits] is going to be the fight against climate change — where we are seeing some political cracks, even in Europe."

Zoom out: Conflicts around how to manage (or bring down) debt levels can tear societies apart, and open up room for populism and divisiveness, Zettelmeyer added.

The key question: "Given the increased ambitions concerning the role of government that appeared in the pandemic ... How can governments finance all [these priorities] in a way which is compatible with financial stability in particular, and macroeconomic stability in general?" Vitor Gaspar, director in the IMF fiscal affairs department, said at the event.