The ongoing U.S.-Israeli conflict with Iran poses a significant threat to government finances worldwide, according to a warning issued by the International Monetary Fund (IMF) on Wednesday. The organization highlighted an already precarious state of public debt across the globe, exacerbated by the latest energy crisis that has triggered a surge in budgetary pressures in Europe and beyond as governments scramble to protect citizens and businesses.
Debt levels reach alarming heights
In its latest semi-annual Fiscal Monitor report, the IMF noted, “Global public debt dynamics did not improve in any material way in 2025, and the outbreak of war in the Middle East has added a new source of fiscal pressure to an already strained global landscape.” The report indicated that global government debt had surged to nearly 94 percent of gross domestic product (GDP) last year and is projected to exceed 100 percent by 2029, driven primarily by significant deficits in the United States, China, and Japan.
The situation in the U.S. is particularly concerning, with the government running a general deficit of 7 to 8 percent of GDP while operating near full capacity and lacking a clear debt reduction strategy. The IMF noted that current fiscal policies, largely influenced by President Trump’s “One Big Beautiful Bill” from the previous year, are anticipated to push debt levels to a staggering 142 percent of GDP by 2031.
Urgent measures needed to avoid debt crises
During a press briefing, Rodrigo Valdés, the IMF’s Fiscal Affairs Director, emphasized the need for Washington to establish a “credible” plan to reduce the deficit by 4 percentage points. As governments accumulate more debt, their interest costs increase, which diverts essential tax revenues away from critical sectors such as health care, education, and pensions. This issue has intensified since central banks, including the Federal Reserve and the European Central Bank, ceased their extensive bond-buying programs that had previously supported economic stability.
“Broad or aspirational commitments to undertake fiscal consolidation are no longer sufficient” for those with the worst debt positions, the IMF stated.
In addition, the IMF expressed concern over European governments employing “get-out” clauses to limit borrowing, which has become necessary to finance escalating defense budgets. This trend forces difficult choices regarding traditional expenditure priorities. Valdés cautioned that the risk of a government debt crisis must not be disregarded simply because financial markets currently appear stable. He pointed out that both the U.S. and Europe are increasingly reliant on volatile investors, such as hedge funds, to absorb their growing debt, contrasting sharply with Asian nations that benefit from more stable domestic long-term investors.
The IMF also reiterated the critical need to address the challenges posed by aging populations, which compound existing debt issues. As interest rates rise, governments are compelled to allocate larger portions of their tax revenue to interest payments. The Fund urged the U.S. to manage the growth of Medicare and Social Security spending responsibly and called on France to reform its pension system, which has led to political turmoil due to the difficulty in curbing early retirement. Moreover, Finland and Portugal were advised to control automatic increases in health and pharmaceutical expenditures, while Belgium was warned that its sustainability goals could not be achieved without cutting back on other expenditures.