Author
Maria Syed
Economics Consultant
The shrinking room to breathe
When International Monetary Fund (IMF) Managing Director Kristalina Georgieva delivered her speech, “Rebuilding Buffers Without the Luxury of Time,” her message sounded non-negotiable: governments can no longer afford to ignore mounting public debt. “High debts and deficits hurt countries’ ability to buffer shocks and can also be inflationary,” she warned, adding that economic growth alone cannot reverse rising debt trajectories quickly enough without fiscal effort.
The warning arrives at a precarious moment. Following years of pandemic disruption, inflationary pressures and geopolitical conflict, governments are confronting rising borrowing costs alongside growing demands for public support. Yet beneath the IMF’s call for fiscal restraint lies a more difficult question: how can governments restore financial stability without transferring the cost of global crises onto the people least able to bear it?
This tension exposes the central challenge of mainstream economic policymaking. Fiscal discipline may be necessary, but its consequences depend on who bears the burden, which expenditures are reduced and whether governments can protect the foundations of future growth.
The debt trap: When borrowing becomes more expensive
The scale of the challenge is becoming increasingly difficult to overlook. According to the IMF’s October 2026 Fiscal Monitor, global public debt reached approximately 94 per cent of gross domestic product (GDP) in 2025 and is projected to approach 100 per cent by 2029. Meanwhile, borrowing costs have increased across major advanced economies.
In October 2026, IMF economists Era Dabla-Norris and Rodrigo Valdes highlighted how high debt intensifies the relationship between fiscal policy and interest rates. When interest rates rise, governments with substantial debt burdens face larger increases in debt-servicing costs. Investors may also become more sensitive to fiscal developments, potentially demanding higher returns to compensate for perceived risks.
This creates a troubling cycle: higher borrowing costs widen deficits, wider deficits can increase concerns about debt sustainability, and those concerns can make future borrowing even more expensive.
For governments, the implications extend beyond accounting. Money allocated to interest payments cannot simultaneously be spent on hospitals, schools, infrastructure or social protection. The longer this pressure persists, the narrower the space for responding to another economic shock.
The managing director’s argument is therefore not without economic justification. Fiscal buffers determine financial room that allows governments to respond to emergencies matter precisely because crises rarely arrive according to budgetary plans. However, rebuilding these buffers is not simply a technical exercise. It is also a question of political priorities and social consequences.
The paradox of fiscal restraint
The IMF acknowledges that consolidation is difficult and recommends credible medium-term plans, structural reforms and targeted support for vulnerable populations. Nevertheless, the practical challenge is determining how countries should consolidate their budgets when economic conditions remain fragile.
Reducing public expenditure may improve government finances, but indiscriminate cuts can weaken demand, discourage investment and undermine essential services. If reductions in spending slow economic activity, tax revenues may fall, making debt reduction more difficult than anticipated.This is the paradox at the heart of austerity: a policy intended to restore fiscal stability can undermine the economic capacity required to achieve it if it is poorly designed or implemented too quickly.
The distinction between productive and unproductive expenditure is therefore critical. Improving tax collection, closing loopholes, eliminating poorly targeted subsidies and strengthening public financial management may create fiscal space without placing the entire burden on essential services. By contrast, cuts to education, healthcare and infrastructure can weaken long-term productivity and disproportionately affect lower-income households. Fiscal consolidation should consequently be judged not only by the size of the deficit it reduces, but also by the economic and social foundations it preserves.
The global imbalance: Advanced economies do not operate in isolation
The warning is particularly significant for systemically important advanced economies, whose fiscal decisions can influence financial conditions far beyond their borders.
When major economies borrow heavily, changes in their bond yields can affect international investment decisions, financing costs and exchange rates. Tighter global financial conditions may then place additional pressure on emerging markets and developing economies, especially those dependent on foreign borrowing or vulnerable to capital outflows.
However, the problem extends beyond government budgets. Global imbalances also reflect differences between private savings and investment, as well as persistent trade surpluses and deficits. Countries that consume and invest less than they produce may accumulate external surpluses, while countries that spend more than they save may rely on borrowing and foreign capital.
Actually, addressing these imbalances therefore requires more than asking deficit countries to cut expenditure. Surplus economies may also need policies that encourage domestic consumption, productive investment and stronger internal demand. The IMF itself has emphasised that adjustment must involve both surplus and deficit countries. Without such coordination, fiscal adjustment risks becoming uneven: some economies preserve their room to manoeuvre while others absorb the costs through weaker investment, expensive debt and slower development.
Human cost of economic shocks
The consequences become especially visible in developing countries, where fiscal constraints collide with immediate household needs.IMF’s warning that low-income countries affected by the Iran war-driven energy shock face difficult choices, with some potentially requiring spending cuts or debt restructuring. IMF Deputy Director of Research Petya Koeva Brooks noted that repeated global shocks had substantially increased debt levels while making inflation a persistent problem.
She also warned that rising prices for everyday goods including beverages and rice could generate a wider “domino effect.”Pakistan illustrates the vulnerability of economies exposed to imported energy costs, food-price pressures and limited fiscal space. When fuel becomes more expensive, transportation and production costs can rise, feeding into the prices of essential goods. Households then face declining purchasing power, while governments must decide how much assistance they can afford.
The dilemma is severe. Broad subsidies may be fiscally costly and can benefit wealthier consumers disproportionately. Yet withdrawing support too abruptly can leave low-income households struggling to afford necessities.The IMF’s preference for narrow, temporary and targeted subsidies attempts to reconcile these competing demands. But effective targeting requires administrative capacity, reliable information and timely delivery conditions that may be difficult to secure during a crisis.The deeper question is whether developing countries can reasonably be expected to rebuild their fiscal buffers while simultaneously absorbing external shocks they have limited power to prevent.
The SWANA crisis further demonstrates how quickly external shocks can undermine domestic economic plans. It is reported that the IMF expected economic output across the Middle East, North Africa and Pakistan to contract by 1.3 per cent in 2026, reflecting the effects of war on energy production, shipping, tourism and trade.The implications reach beyond countries directly involved in the conflict. Disrupted supply chains and rising energy costs can intensify inflation elsewhere, complicating the task of central banks and increasing pressure on government budgets.
This context makes Georgieva’s emphasis on structural reform important, but also difficult to implement. Governments need expansive productive capacity but through investment in social protection, health, climate resilience and education. While economic resilience, therefore, cannot be measured solely by the ability to reduce deficits,it importantly needs the capacity to maintain essential services, protect vulnerable households and support recovery when external shocks worsen.
Conclusion: Fiscal discipline must serve economic resilience
The IMF’s call to rebuild fiscal buffers reflects a genuine concern: heavily indebted governments have less room to respond to crises, while higher interest rates can intensify existing vulnerabilities. Ignoring these pressures would expose economies to further financial instability.
Yet fiscal discipline is not an end in itself. Its purpose should be to strengthen economies’ ability to withstand future shocks without sacrificing the conditions necessary for inclusive development and growth. That requires a more balanced approach: credible fiscal plans, fairer and more effective taxation, productive public investment in sectors that values wellbeing beyond growth and coordination to address persistent savings, investment and trade imbalances. It also requires recognising that advanced economies and developing countries do not enter this adjustment process with equal financial resources or equal exposure to global shocks.
Ultimately, the question is not whether governments should rebuild their buffers, but how they should do so and who should be benefiting from it. A country may achieve a narrower deficit while leaving its population more vulnerable, its public services weaker and its prospects for growth diminished.The real test of fiscal responsibility is not simply whether governments can balance their books today, but whether their policies leave societies better equipped to face the crises of tomorrow.