Fiscal Deficit & Public Debt Projections (2023-2026) in contrast with Financial Stability Risks: Testing Vulnerabilities Against Reality
This economic analysis is synthesised from the World Economic Outlook 2025 Update, Global Financial Stability Report, Future of Jobs Report 2025, and Fiscal Monitor. The analysis highlights the macroeconomic outlook, financial stability risks, labor market trends, and fiscal policy projections for 2025.
Fiscal Policy Trends in 2025
• Fiscal Consolidation Needed: Fiscal deficits increased to 5.5% of GDP in 2023, largely due to declining revenues. Consolidation is projected to bring the deficit down to 4.9% in 2024 and 4.3% by 2029 .
• Debt Projections:
• Global public debt to reach 100% of GDP by 2029.
• Key economies (China, U.S., U.K., Italy) to see debt nearly double by 2053.
• AI and Green Investments: Fiscal policy should encourage innovation and green investments to offset slowing growth.
Financial Stability & Risks in 2025
• Key Financial Risks:
• Commercial real estate prices are declining, posing risks to financial institutions .
• Private Credit Growth: Expansion of private credit funds is increasing financial sector vulnerabilities, with concerns about transparency, leverage, and default risks .
• Cyber Risks: Financial markets face rising risks from cyber threats, with increasing attacks on financial institutions .
• Positive Developments:
• Major financial institutions have remained resilient despite higher interest rates.
• Bank failures in 2023 did not escalate into systemic crises
Financial Stability Risks: Testing Vulnerabilities Against Reality
The Global Financial Stability Report (GFSR) identified several key risks in the financial system for 2024–25 – notably potential real estate downturns, rapid private credit expansion, and emerging cyber threats – even as it noted that immediate systemic risks appeared contained . Comparing these projections to recent developments reveals a mix of alignment and near-misses: many vulnerabilities flagged by the IMF have indeed shown signs of stress, though thankfully no full-blown financial crisis has erupted. Still, markets in 2024 have experienced bouts of turmoil that echo the GFSR’s warnings.
Real estate downturns: The IMF pointed to real estate – especially commercial real estate (CRE) – as a significant vulnerability. The GFSR observed that “pressures on the commercial real estate sector continue to be acute”, and banks globally have non-trivial exposure to this sector . In 2023, we already saw the consequences of rising interest rates on property: higher mortgage costs led to falling real estate values in many advanced economies, with commercial property prices down sharply (the IMF noted the decline in CRE values was the steepest in decades in some markets ). Recent news aligns with this concern. In the United States, for example, downtown office buildings – facing low occupancy from remote work – have plummeted in value, and some high-profile office owners defaulted on loans in 2024. Smaller and regional banks, which hold a lot of CRE loans, came under the microscope after the spring 2023 bank failures. The IMF’s April 2024 report highlighted a “tail of weak banks” that could face a “triple whammy”: heavy CRE exposures, large bond losses from high interest rates, and reliance on uninsured deposits . This scenario was uncomfortably illustrated by the failure of several U.S. regional banks (like SVB and Signature in 2023) and the distress of others through 2024. So far, however, the overall banking sector has stabilized – major banks have strong capital, and even those 100+ smaller banks flagged by the IMF as vulnerable have not triggered a broader meltdown . Why? Largely because the economy remained reasonably strong, allowing most borrowers to keep paying loans. As the IMF noted, a “relatively strong economy” has partially offset the CRE price declines . Additionally, regulators and banks have been proactive in recognizing and provisioning for potential real estate losses. In Europe, a similar story: office markets in cities like London and Frankfurt softened, and some real estate investment funds saw outflows, but we haven’t seen a wave of bank failures there. China’s real estate downturn is another major risk identified by the IMF , and it has definitely materialized. Throughout 2024, China’s property developers like Evergrande and Country Garden struggled or defaulted, property sales fell, and home prices in many cities dropped – a combination that threatened some banks and shadow lenders. The government had to intervene with support measures (such as easing credit for developers, encouraging state banks to extend loans, and even direct purchases of unfinished projects) . This has prevented a chaotic collapse, but China’s property sector remains a fragile fault line for financial stability. In sum, the projected real estate risks are playing out in reality, putting pressure on specific institutions and markets. While a systemic crisis has been averted so far, the stress in real estate is very much real: it validates the GFSR’s focus on this sector. Continuous monitoring is warranted, as higher-for-longer interest rates in 2025 could further test heavily indebted property investors.
Private credit expansion: The GFSR also sounded an alarm on the rapid growth of private credit – loans and financing coming from outside the traditional banking system (for example, debt funds, private equity firms lending directly, etc.). Policymakers are concerned because this shadow credit market has boomed, but it has not yet been through a full economic downturn at its current scale . The IMF warned that authorities lack visibility into these non-bank lenders and urged a “more intrusive” oversight approach . Recent developments show this risk moving into focus. In late 2024, global financial regulators (like the Financial Stability Board) echoed the IMF, noting that private credit has become significant and interconnected with banks and investors . For instance, many institutional investors (pension funds, etc.) have piled into private debt for higher yield, and banks often work with private credit funds on large leveraged deals. So far, we haven’t witnessed a major crisis originating in a private credit fund, but there are signs of strain: default rates on leveraged loans (often held by these private vehicles) have ticked up as economic growth slows and interest costs rise. A few high-profile private loans have had to be restructured quietly. There’s also been a pullback in new lending by some private funds, reflecting caution. Essentially, the vulnerability is growing as projected – we see that the credit cycle is turning, and the weakest borrowers (often those financed by non-bank lenders) are under pressure. However, because this sector is opaque, it’s hard to gauge in real time. That lack of transparency itself is a risk the IMF highlighted, and it remains an issue. Regulators in the U.S. and Europe have started asking for more data on private credit portfolios, indicating they share the IMF’s concern. The bottom line is that this risk factor hasn’t exploded into a crisis (which is good news), but the conditions for potential trouble are present – exactly what the IMF foresaw. If the economy hits a snag in 2025 or if interest rates stay high longer than borrowers anticipated, we could see more significant defaults in the private credit space. The GFSR’s call for closer supervision is being heeded in part, but it’s an area where reality could diverge negatively if hidden leverage builds up unaddressed.
Fiscal Deficit & Public Debt Projections (2023-2026) vs. Financial Stability Risks:
Fiscal Deficit & Public Debt Trends – Comparing advanced and emerging economies’ fiscal balance and public debt as a percentage of GDP.
Financial Stability Risks – A stress test index tracking vulnerabilities in the financial system over time.
Cyber risks: In a notable addition, the April 2024 GFSR was the first to treat cyberattacks as a serious financial stability risk . The IMF pointed out that cyber incidents in the financial sector are growing in frequency and severity – losses from cyberattacks have moved from millions to billions of dollars, and the number of attacks has nearly doubled since pre-pandemic times . This projection unfortunately aligns with real-world trends. We have seen a surge of cyberattacks on financial institutions in recent years, ranging from ransomware hits on banks and fintech companies to attempted hacks of payment systems. For example, 2023 saw cyber incidents like a major U.S. bank experiencing a data breach affecting millions of customers, and stock exchanges in Asia facing trading halts due to suspected cyber interference. None of these incidents yet caused a systemic meltdown, which the IMF also noted – no single cyber event has taken down the broader financial system . But the risk is accumulating: each successful hack erodes confidence and highlights potential weak links. The IMF’s warning that extreme cyber losses are increasingly plausible resonates with bank regulators, who in late 2024 ran cyber “war game” simulations to test resilience. Many emerging markets are less prepared, and the IMF specifically urged those countries to bolster defenses . Recent policy responses include cross-border exercises and information-sharing initiatives among central banks to improve cyber resilience, reflecting the projected need for action. In sum, the rise of cyber threats is very real, mirroring the GFSR’s analysis. Financial firms are pouring resources into cybersecurity (often citing the growing threat landscape), and insurers are hiking cyber insurance premiums – concrete evidence that this risk is being taken seriously. While we can’t measure cyber risk as easily as a balance sheet item, the anecdotal evidence and expert commentary confirm that it’s accelerating as the IMF feared. One divergence might be that, thankfully, we haven’t yet witnessed a truly catastrophic cyberattack on, say, a major payment network – so the worst-case scenario hasn’t materialized. The task is now to stay ahead of hackers, and here the IMF’s call for vigilance is echoed strongly by officials in current news.
Financial market volatility and other risks: The IMF also observed an interesting disconnect: market volatility has been low even while economic uncertainty is high . This can sow the seeds of instability if a shock occurs and markets suddenly re-price risk. Indeed, through much of 2024, stock markets rallied and credit spreads stayed tight as investors bet on a soft landing. For example, U.S. equity indices rose strongly (the S&P 500 was up over 15% in 2024) and volatility indices remained muted. This benign market environment coexisted with obvious economic risks (war, inflation, etc.), matching the IMF’s description of a “macro–market disconnect” . In late 2024, we saw a glimpse of how this could flip: when U.S. bond yields spiked to multiyear highs in October, global stocks wobbled and some emerging market currencies came under pressure. It wasn’t a crisis, but it reminded everyone that high asset valuations can correct quickly if conditions change. The GFSR flagged lofty asset valuations and high leverage as vulnerabilities , and recent market movements validate that concern. Notably, the crypto market – while much smaller now – had its own mini turmoil in 2022, and in 2024 remained volatile; however, it hasn’t posed a systemic risk in the way real estate or credit might. Another area, sovereign debt in emerging markets, has seen stress (e.g. some countries like Ghana, Pakistan faced debt crises), aligning with IMF worries that weaker fiscal buffers could lead to funding strains . In 2024, several frontier economies sought restructurings or IMF help, underscoring that global financial stability concerns are not limited to rich-world banking – they also include the sovereign debt arena.
Overall, financial stability risks in 2024–25 are broadly tracking the IMF’s projections. We’ve observed stress in the very areas the GFSR highlighted: property markets, non-bank credit, and cybersecurity. The silver lining is that these risks, while elevated, have thus far been managed without triggering a global financial meltdown. The banking system is better capitalized than before, and regulators have been alert – for example, the swift actions during the March 2023 banking scare helped contain it. Still, the IMF’s caution that medium-term vulnerabilities are “mounting” appears accurate . Global debt levels (public and private) are high, and any shock – a resurgence of inflation forcing higher rates, a geopolitical event, etc. – could amplify through these vulnerabilities . Indeed, the recent stability might breed complacency, which the IMF warned against. A Reuters summary of the GFSR noted the IMF was “cautioning against overexuberance” in markets, precisely because stretched valuations and rising debt could become problematic if the macro environment shifts . This message is clearly reflected in real-world commentary as well, with many analysts in early 2025 echoing that sentiment. In conclusion, the alignment between GFSR warnings and real events is quite strong – the issues foreseen are the ones making headlines – and where there are no major divergences yet, it’s partly because policymakers have heeded those warnings to some extent (e.g., monitoring banks more closely, preparing for cyber threats). The challenge will be continuing to “steady the course,” as the October 2024 GFSR put it, in the face of whatever shocks 2025 might bring .
Fiscal Policy Trends: Consolidation on Hold?
The IMF’s Fiscal Monitor (Oct 2024) struck a wary tone on public finances, urging governments to rein in deficits and debt now that the pandemic is behind us . It projected global public debt would exceed $100 trillion in 2024, continuing to rise, and warned that in a severe scenario debt could reach 115% of GDP within a few years . In short, the IMF called for ambitious fiscal consolidation – “much larger adjustments than currently planned” – to stabilize debt and rebuild fiscal buffers . The question is: are governments actually heeding this advice, or is fiscal policy diverging from the envisioned path? So far, many major economies are not consolidating as much as the IMF would like. In some cases, deficits have even grown, reflecting new spending priorities and political constraints.
IMF’s expectation: The Fiscal Monitor essentially laid out a roadmap for gradual but decisive tightening of budgets. It argued that with growth still positive and inflation reducing debt ratios a bit, now was an opportune time to cut deficits – delaying would be costly as interest burdens mount . The IMF acknowledged the difficulty, especially in 2024’s “great election year” (with many countries heading to polls), but emphasized that without fiscal discipline, high debt could threaten both sustainable growth and financial stability . The baseline assumption in IMF projections is that countries would generally follow through on announced consolidation plans (e.g. EU reinstating fiscal rules, US allowing some temporary spending to expire, etc.), leading to modest improvement in structural deficits over the medium term.
Reality check – United States: The U.S. exemplifies the divergence from consolidation. Despite strong economic growth in 2022–24, the U.S. federal budget deficit widened significantly. For fiscal 2024 (ended Sep 2024), the deficit hit $1.83 trillion (6.4% of GDP), up from 6.2% the year before . This is one of the largest peacetime deficits on record, only surpassed by the extraordinary pandemic spending years . Several factors drove this: rising interest costs (the U.S. paid over $1 trillion in interest on its debt for the first time) , growth in mandatory spending like Social Security and Medicare, and sustained defense and infrastructure spending . Notably, the U.S. enacted big investment packages – on infrastructure, semiconductor incentives, and climate/clean energy (the Inflation Reduction Act) – which, while potentially boosting growth, add to near-term outlays. There were no major spending cuts; on the contrary, bipartisan deals largely preserved or increased funding for various programs. Tax revenues in 2024 underperformed initial expectations (partly due to a cool-off in stock market capital gains and some tax cuts being extended), which also widened the gap. The IMF’s plea to “put a lid on debt” is largely not reflected in U.S. policy at the moment – if anything, the lid is off. The political climate makes it hard to reverse this: 2024 being an election year meant neither party wanted to campaign on austerity. In fact, there were discussions of tax cuts and higher military spending from both sides. Credit rating agencies took note of this fiscal slippage; Fitch downgraded the U.S. credit rating in August 2024, citing ballooning deficits and political brinkmanship. This underscores the real-world consequence of not following the consolidation script. Going into 2025, unless there is a dramatic shift, U.S. fiscal policy is on a looser path than the IMF’s projections assumed – a clear divergence.
Europe: In Europe, the picture is mixed but also not fully aligned with IMF advice. EU countries had suspended their deficit limits during COVID, and 2024 was supposed to mark a return to some fiscal rules (under a updated framework). The IMF’s baseline was that European governments would trim deficits gradually to comply with debt sustainability requirements. What happened? Some consolidation did occur: for instance, pandemic-era supports (like furlough schemes) naturally expired, helping reduce deficits from 2020 highs. But new pressures emerged – energy subsidies in 2022–23 to shield households from high gas prices, and increased defense spending after the Ukraine invasion, have absorbed fiscal space. Germany, traditionally frugal, actually broke its constitutional debt brake in 2023 to fund energy price relief and military investment. Italy and France, with already high debt, made only modest efforts to cut spending, fearing a backlash or derailing their fragile recoveries. By end-2024, France’s deficit was still around 4.5% of GDP, Italy’s about 5% – essentially unchanged from a year prior. The U.K. (outside the EU but relevant) initially planned sharp cuts and tax hikes to calm bond markets after a 2022 crisis, but better-than-expected revenues and political pressure led the government to delay some austerity measures and even consider pre-election tax reductions. In summary, Europe’s fiscal stance in late 2024 is expansionary-neutral at best. The EU did agree in principle to return to fiscal rules in 2025 with more flexibility, but the actual budgets suggest only slight tightening. Many governments are prioritizing growth and social stability over aggressive belt-tightening. The IMF’s call for “rebuilding buffers” is acknowledged in rhetoric, but in practice, fiscal policy remains accommodative in much of Europe. One exception might be countries under IMF programs or market scrutiny – e.g. some Eastern European nations with high inflation did cut deficits significantly to help monetary policy. But big players aren’t leading on consolidation, meaning the overall fiscal impulse in Europe is not as contractionary as the IMF envisioned.
China and emerging markets: China’s fiscal policy in 2024 turned more expansionary to counter its economic slowdown – which is contrary to the idea of consolidation. The government boosted infrastructure spending and allowed local governments to issue more special bonds to support growth. With relatively low inflation, China had room to ease fiscal policy, but this adds to its debt (especially local debt, which is a growing problem). The IMF has often advised China to clean up its local government finances; instead, faced with a property bust, authorities have effectively had to provide fiscal support (bailing out some local projects, cutting taxes on home purchases, etc.). Many other emerging markets are trying to consolidate but face hurdles. For example, countries like Brazil set new fiscal rules to cap spending growth, and have aimed to reduce deficits – but even there, political pressures for welfare spending and tax relief make it challenging to hit ambitious targets. In 2024’s elections (which included many emerging economies), it was common to see promises of social aid or tax cuts, which delay tough adjustments. The Fiscal Monitor (Apr 2024) flagged this dynamic, warning that election-year politics could derail fiscal discipline . That seems to have been prescient: witness Turkey boosting public wages and subsidies ahead of its 2024 vote, or India increasing rural support in its pre-election budget – short-term priorities often outweighed debt concerns.
New spending priorities: A notable trend diverging from pure consolidation is the emergence of new spending initiatives that governments deem essential. Climate investment is one – many countries are pouring money into renewable energy, EV subsidies, and climate adaptation (viewed as long-term investments, as also advocated by IMF in other reports, though it complicates near-term deficits). Defense spending has risen across NATO members due to geopolitical tensions. Industrial policy has made a comeback: the U.S. with its CHIPS and IRA acts, Europe with its own subsidies to keep up, and China always active in industrial support. These add to fiscal burdens but are seen as strategic. The IMF would ideally like such spending to be offset by savings elsewhere or higher revenue, but politically that’s tough. On the revenue side, there have been some steps aligned with IMF guidance – for instance, a global minimum corporate tax deal (to boost revenues) is slowly being implemented, and some countries have introduced windfall taxes on energy companies or started removing costly fuel subsidies as oil prices stabilized. Those moves help at the margin. Yet, by and large, the story is that fiscal consolidation is proceeding slower than expected. The IMF projected debt ratios to stabilize only with “much larger adjustments” than currently planned , implying current plans are insufficient. Real-world fiscal plans remain roughly in that insufficient zone.
Consequences and outlook: The divergence between IMF projections and actual fiscal trends is reflected in debt trajectories. Global debt as a share of GDP fell in 2021–22 from pandemic highs (helped by inflation and rebound growth), but the IMF shows it rising again from 2024 onward . Recent data back this up: the U.S. debt-to-GDP is climbing, and several advanced economies’ debts have stabilized at best, not fallen. Higher interest rates are now biting, as seen with the U.S. interest costs crossing $1 trillion . The risk is that if governments don’t adjust, interest expenses will crowd out other spending, and markets may start demanding higher yields for fear of fiscal unsustainability. We saw a hint of that in 2024: the U.S. 10-year Treasury yield jumped above 5% for the first time in 16 years, partly on concerns about heavy U.S. borrowing needs. Italy’s bond spreads also rose in mid-2024 as its budget plans worried investors. These market signals reinforce the IMF’s message that “delaying is costly” – delay in consolidation raises the risk of a debt financing crunch. So far, no major economy has hit a wall (we haven’t had a euro debt crisis redux or a U.S. debt crisis), but the pressure is building. On the flip side, some argue that austerity now would be ill-timed when growth is fragile – a valid debate. Some governments choose the path of sustaining growth (through spending) in hopes it improves debt/GDP naturally. This is a gamble the IMF is wary of.
In summary, fiscal policies are looser than the IMF’s projected consolidation path in many cases. The alignment is poor: the Fiscal Monitor’s call for tightening has largely not been answered yet. Instead, new spending (on defense, green transitions, cost-of-living relief) and politics have kept deficits relatively high. The IMF’s concern that without adjustment, global debt will keep climbing is being borne out – we see that in the numbers and market reactions. However, it’s possible that after the 2024 election super-cycle, more countries will pivot to deficit reduction in 2025–26 (especially if growth stabilizes and inflation makes high nominal spending less necessary). If not, we might see more frequent market backlash or forced austerity down the road. The fiscal outlook in reality diverges by being more expansionary than the IMF baseline, which could pose risks if not corrected. Thus, one of the key insights is that while the IMF projections provided a prudent path, the real world is testing the limits of fiscal flexibility – something to watch closely as we compare projections to outcomes.
Sources: World Economic Outlook Update (IMF, Jan 2025) ; Global Financial Stability Report (IMF, Apr/Oct 2024) ; Fiscal Monitor (IMF, Oct 2024) ; WEF Future of Jobs Report 2025 ; Reuters and news reports for recent economic developments.