The International Monetary Fund (IMF) has issued a warning that major economies face their largest budget deficits since the onset of the Covid-19 pandemic, urging immediate action to restore fiscal stability. In its latest World Economic Outlook, the IMF projected that net borrowing by advanced economies would reach 5.2 percent of GDP in 2026, the highest level since 2021 during pandemic lockdowns.

The report highlighted concerns over rising deficits in key countries, with forecasts indicating that China and the United States could see budget shortfalls hitting or exceeding 8 percent of GDP by 2026. This marks a worsening trend since the IMF’s previous update in April, amidst ongoing volatility in global debt markets characterized by surging yields and increased borrowing costs.

IMF Chief Economist Silvana Tenreyro emphasized that while the global economy has shown resilience, this robustness is nearing its limits. The outlook noted that sovereign debt risks are escalating as global public debt is expected to approach 100 percent of GDP later this decade. The combination of high debt levels, increased borrowing expenses, and growing pressures on public spending underscores the urgency for governments to rebuild fiscal buffers.

Several factors have contributed to the surge in government borrowing costs. Elevated energy prices and persistent economic growth have led central banks in the United States, the Eurozone, and Japan to raise interest rates this year, abandoning previous plans for cuts. These moves have resulted in long-term borrowing costs reaching multi-decade highs, making sovereign debt more vulnerable to abrupt changes in financial conditions.

The situation intensified in September with a bond market sell-off that pushed interest expenses higher, thereby straining public budgets further. For instance, government net borrowing in the United States is forecast to reach 8.5 percent of GDP this year, up from 7.1 percent in 2025 and 5.8 percent before the pandemic. Similarly, the euro area is expected to see net borrowing rise to 8.5 percent of GDP in 2026.

The IMF also highlighted potential challenges for central banks, which may face political and fiscal pressures to support increased public borrowing or tolerate inflation rates above their targets.

In terms of economic growth, the IMF predicted that the global economy would expand by 3.1 percent this year, a slight upward revision from earlier estimates, and is expected to grow 3.4 percent in 2027. The fund credits the momentum in artificial intelligence-driven investment as a factor supporting this growth, though it warned that benefits from AI advances are unlikely to be evenly distributed across countries. Growth is increasingly concentrated in a smaller group of economies, leaving others at risk of lagging behind.

Overall, the IMF’s findings underscore the importance of urgent fiscal measures to address rising deficits and debt vulnerabilities amid a complex global economic environment marked by high inflation, tightening monetary policies, and uneven growth prospects.