F&D Magazine. High Debt, Hard Choices- March 2026
This article by Era Dabla-Norris and Rodrigo Valdes analyzes the growing challenges posed by rising public debt and higher interest rates. It argues that governments can no longer postpone difficult fiscal decisions. Instead, policymakers must confront trade-offs more directly in a context of limited fiscal space and increasing demands on public spending. The authors emphasize that macroeconomic stability now depends not only on technical policy choices but also on public trust.
Rising debt and shrinking fiscal space
Public debt had already been increasing before the COVID-19 pandemic. However, the crisis accelerated borrowing across both advanced and emerging economies. As noted in the article, global public debt reached 93.9 percent of GDP in 2025 and is projected to exceed 100 percent by 2028.
At the same time, borrowing conditions have changed. Interest rates have risen sharply, while growth trends remain relatively modest. Consequently, debt servicing costs have increased significantly. For example, in the United States, net interest payments rose to 4.2 percent of GDP in 2025, surpassing defense spending.
As a result, governments face tighter budget constraints. Higher interest payments crowd out other priorities and reduce the capacity to respond to future shocks. Therefore, the era of easily financing deficits through cheap borrowing has effectively ended.
Fiscal trade-offs and policy dilemmas
The authors highlight several core trade-offs shaping fiscal policy. First, governments must balance expanding public services with limited willingness to raise taxes. Demand for social protection, infrastructure, and climate-related spending continues to grow. However, revenue mobilization often lags behind these expectations.
Second, policymakers must reconcile flexibility with credibility. On one hand, governments need room to respond to crises. On the other hand, they must maintain confidence in debt sustainability. Excessive austerity can deepen recessions. In contrast, ignoring deficits can trigger market instability.
Third, there is a tension between investing today and preserving fiscal space for future shocks. Immediate needs—such as defense, climate transition, and social inclusion—require substantial resources. Nevertheless, excessive borrowing today may leave countries vulnerable in future crises. These trade-offs are becoming increasingly explicit, as debt can no longer conceal distributional choices.
Intergenerational implications of high debt
High public debt also raises questions of fairness across generations. Borrowing allows governments to smooth consumption and finance investment. However, persistent deficits shift the burden to future taxpayers.
Demographic trends intensify this challenge. Aging populations increase spending on pensions and health care, while the workforce shrinks. As highlighted in the article, advanced economies are moving toward a ratio of only two workers per retiree by 2050.
In addition, rising debt service reallocates public resources toward creditors. This reduces funding available for education, infrastructure, and innovation. Consequently, younger generations may inherit both higher tax burdens and weaker growth prospects. The longer adjustment is delayed, the more abrupt and costly it becomes.
Trust as a condition for fiscal adjustment
A central argument of the article is that public trust is essential for successful fiscal reform. Without trust, even well-designed policies face resistance. Survey evidence cited by the authors shows that many citizens misunderstand basic fiscal concepts and underestimate debt levels.
Moreover, concerns about fairness shape public attitudes. People are less likely to support reforms if they believe costs will be distributed unequally. For instance, fears about pension cuts or higher taxes reduce political support, regardless of economic necessity.
However, trust can improve policy outcomes. When citizens perceive fiscal policy as transparent and fair, they are more willing to accept difficult adjustments. Therefore, strengthening institutions becomes critical. Measures such as fiscal transparency, independent fiscal councils, and effective public financial management can help build credibility.
Reference
Dabla-Norris, E., & Valdes, R. (2026, March). High debt, hard choices. Finance & Development, International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/2026/03/high-debt-hard-choices-era-dabla-norris