London, 13 October 2026 — EBM Newsdesk Analysis — By Nick Staunton
The world’s biggest economies are on course for their largest budget deficits since the pandemic, according to the International Monetary Fund. The Fund used this week’s annual meetings in Bangkok to call for “urgent” action to rebuild public finances. The warning, reported by the Financial Times, comes as bond markets are already charging governments the highest borrowing costs in a generation.
The concern is not a single bad year. Governments ran up deficits to fight Covid, then kept borrowing through the energy shock, rearmament and a run of elections. The IMF’s view is that the emergency has ended but the spending hasn’t.
The Numbers Behind the Warning
Kristalina Georgieva, the IMF’s managing director, set out the argument in Singapore last week. Global public debt is close to its post-war peak and could pass 100% of world GDP before 2030. She named advanced economies as the “worst offenders” and said she could see “no decisive action” from the most indebted of them.
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Subscribe“Fiscal space is crying out for replenishment,” she said, adding that governments “can no longer rely on higher growth rates alone to solve fiscal problems.”
The US shows the problem most clearly. Washington closed fiscal 2026 with a deficit of almost $2tn, the third largest on record after the two Covid years. Spending rose about twice as fast as revenue, and interest on the national debt rose 11% to more than $1.1tn. Tariff income, presented as a source of new revenue, fell after court-ordered refunds.
Why Markets Are Already Pricing It In
Investors aren’t waiting for the IMF. Ten-year government bond yields are at their highest since 2007 in the US, since 2009 in Germany and since 1996 in Japan. French borrowing costs are at a 24-year high, and UK 30-year gilts have yielded above 6%. As EBM argued after the global bond sell-off, markets are pricing in a world where governments have to pay to borrow again.
That changes the arithmetic. When rates were close to zero, a government could run a deficit and see its debt ratio stay flat. That period is over, as we set out in the end of cheap money. Each year of higher yields moves more of the budget from public services into interest payments.
Central banks aren’t helping. Georgieva called the recent rate rises by the Federal Reserve, the ECB and the Bank of Japan “highly appropriate” and said a “prudently hawkish bias” may suit many economies. After the Fed’s surprise rate rise, finance ministries can’t count on monetary policy to bring their borrowing costs down.
Europe’s Squeeze
Europe has particular pressures of its own. The Iran war has kept oil close to $100 a barrel, well above the $89 the IMF assumed in July, and the Hormuz shock has revived the demand for energy subsidies that drove borrowing up in 2022. Defence budgets are also rising sharply under NATO’s new targets, and rearming Europe is being paid for largely with borrowed money.
The IMF’s October outlook makes it harder still. It expects global growth to slow to 3.1% in 2026 from 3.5% last year, and global inflation to rise to 4.7%. With slower growth, higher prices and higher rates all at once, governments have little room to grow their way out of their debts.
The Fund’s answer is credible medium-term consolidation: spending restraint and tax changes set out over several years, not cuts made in a panic once bond markets have turned. It argues that restraint now also helps contain inflation, which is a policy goal in itself.
Where This Goes
I don’t think this is a routine IMF warning. In the 2010s the Fund issued similar warnings, markets ignored them and governments borrowed cheaply anyway. This time the bond market is enforcing the message.
The difficult part is politics. Ageing populations, defence, energy security and the climate transition all need more money, and none of them has a constituency that will accept being cut. France has already shown what happens when a government can’t pass a budget. Britain knows how fast the gilt market can force a policy reversal.
The economies that publish credible plans in the next 12 months will keep the market’s confidence. The ones that wait until the market forces them will face austerity on worse terms. Georgieva’s own phrase was that “fiscal space is crying out for replenishment.”
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