IMF urges advanced economies to cut debt as borrowing costs climb

The head of the International Monetary Fund has warned that advanced economies, including the United Kingdom and the United States, must reduce their borrowing and lower debt levels. Kristalina Georgieva, the IMF managing director, made the remarks during an exclusive interview held on the sidelines of the United Nations General Assembly in New York City. She stated that global economic shocks had driven debt levels higher, yet governments had failed to take sufficient action to contain the rising costs of servicing that debt.

Georgieva emphasised that while certain economic factors are beyond the direct control of national governments, domestic policy remains within their command. She outlined two critical priorities for advanced economies: bringing debt levels down and making fiscal consolidation a central objective. Additionally, she stressed the importance of ensuring that central banks fulfil their mandate for price stability. The IMF chief described the necessary measures as politically difficult but essential, urging politicians to demonstrate the courage required to implement such steps.

The warning comes amid a surge in government borrowing costs, partly driven by wars that have disrupted oil supplies and fuelled inflation. In the United Kingdom, speculation is building over potential tax and spending policies ahead of Prime Minister Andy Burnham’s first Budget next month. Recent data indicates that borrowing, defined as the difference between tax receipts and government spending, reached £18.3bn in August. This figure was almost a fifth higher than the same period in the previous year and exceeded official forecasts. Debt interest for the month recorded the highest August figure since monthly records began in 1997.

The United States, the world’s largest economy, has also been affected by higher borrowing costs. Its national debt has surpassed $40tn, doubling within a decade and prompting concerns both domestically and internationally. Georgieva noted that the UK’s position regarding higher interest costs was not significantly different from that of other major economies. She praised the UK for taking consistent action to lower debt and implementing planning and housing reforms. She argued that advanced economies lack the financial resources to boost growth directly and must therefore rely on reforms to encourage private sector investment.

Rising bond yields are also being influenced by increased competition in the bond market. Large technology companies are raising substantial funds to invest in artificial intelligence development, which adds pressure to interest rates. Georgieva referenced recent concerns about the loss of safe control over AI systems as a potential financial stability risk. She warned that if AI systems were to operate autonomously in problematic ways, it could pose a significant threat to financial stability. The IMF assessment suggests the global economy is currently affected by two opposing forces: the energy price shock and the surge in AI investment. Georgieva highlighted the need for oil and gas exports from the Gulf to resume in a durable manner to allow the energy supply shock to become a thing of the past, describing this as a significant step towards normalisation that has yet to be achieved.