Three paradigm shifts and four practical reform ideas for debt and public finance for sustainable development

Three paradigm shifts

1. From debt quantity to debt quality

A growing consensus, articulated by the Jubilee Commission and others, is that the global debt crisis is not only about excessive debt levels. Rather, it is also about too much of the wrong kind of debt and too little of the kind of debt that supports sustainable development.

Much of today’s debt is short-term, procyclical, and poorly aligned with long-term investment needs. It is increasingly beholden to private creditors who put their own interests above that of the public good, prioritizing liquidity over transformation. As of 2024, low- and middle-income countries owed 72% of their long-term external debt stock¹ to private creditors. In sub-Saharan Africa, the share was 57%, up from 22% in 2000, driven largely by the expansion of sovereign bond markets. The proliferation of private creditors is greater in some countries than others; for instance, private creditors accounted for 90% of South Africa’s external debt in 2020. Private debt is costlier and exempt from restructuring efforts, contributing to the tightening of public budgets. Sub-Saharan Africa’s external debt service was 5.1% of GDP in 2022, compared to 4.9% spent on health that year. With debt service reaching nearly 7% of GDP in the region in 2025, the gap is expected to be even higher.

What is needed instead is a shift toward patient, long-term financing that supports productive capacity, climate resilience, and inclusive growth. This reframing places the quality of debt—its maturity, purpose, and development impact—at the center of debt sustainability discussions. It also requires new instruments and assessment frameworks that distinguish between borrowing for consumption and borrowing for investments that expand a country’s productive and social base.

2. From fiscal space as constraint to fiscal space as capability

A second paradigm shift is redefining fiscal space—not as a fixed “margin” to be spent cautiously, but as a capability that can be built over time. By contrast, traditional approaches treat fiscal space as a narrow, finite margin within government budgets that can be used for priority spending without jeopardizing fiscal sustainability.

This view is overly restrictive. Fiscal space can instead be understood as a resource that can be expanded, particularly through investments that enhance social and environmental sustainability. When governments invest in areas that raise productivity, strengthen resilience, and reduce inequality, they create virtuous feedback loops that improve fiscal outcomes over the medium- to long-term. Well-targeted public investment can relax supply constraints, ease inflationary bottlenecks, and reduce reliance on blunt interest-rate hikes by expanding productive capacity.

Capturing these dynamics requires extending the time horizon of fiscal space analysis beyond annual or near-term balance-sheet targets and adopting a medium- to long-term investment frame—roughly five to 10 years—that explicitly links investment to growth and revenue performance. As Seguino (2025) argues, a practical way to operationalize this shift is to evaluate fiscal choices against a longer-run public sector budget constraint in which revenues rise with gross domestic product. This approach better reflects the economic and fiscal returns of investments in such areas as care services, which also builds resilience to shocks. If successful, such investments become partially self-financing over time.

3. From physical to social infrastructure

There is broad agreement that physical infrastructure—especially climate-resilient infrastructure—is essential for a just transition and a necessary investment toward sustainable development. Yet physical assets cannot function without people. This reality demands a rethinking of ‘social infrastructure’ as a central component of development strategy. Social infrastructure includes schools and education systems, health systems, and care systems for children, older people, and those with disabilities. Care systems deserve particular attention: demand for care services rises across the life cycle, and needs for care are intensifying with climate change. Integrating care into social and physical infrastructure planning—and into climate adaptation finance—is both a resilience strategy and a growth strategy.

Yet these investments are often classified as “current expenditure” or “consumption,” rather than infrastructure that has both an economic and a financial return, deprioritizing their importance in fiscal rules and public investment decisions. Reframing investments in care as social infrastructure investment has concrete implications: It strengthens the case for long-term borrowing for social investments, reinforces the rationale for concessional finance, and aligns budgeting practices with long-term development goals.

Taking these paradigm shifts into consideration, what would be a practical agenda for reform undertaken by both multilateral institutions and national governments? We make two sets of recommendations, building on a range of ideas put forward during the Finance for Development process in 2025.

I. Reforming global debt instruments

Recent proposals, including those from the United Nations’ (U.N.) Secretary-General’s expert group recommendations on debt, point to practical steps that can be taken in the next three years. Four areas merit emphasis.

a. Formalized debt pauses

Debt standstills and pauses that are triggered automatically during shocks can act as stabilizers. Climate-resilient debt clauses pioneered under the Bridgetown Initiative offer a promising model. This logic could be extended to social resilience clauses triggered by sharp deteriorations in poverty and living standards, health, or disasters that create sharp increases in the need for care. The Debt Pause Clause Alliance’s push to enable the postponement of debt service during climate, health, or other crises is a welcome step forward. Barbados’ introduction of a Pandemic Debt Suspension Clause in 2022 is another proof of concept.

Operationalizing such clauses will take research and experimentation, but is feasible. A starting point is using existing early warning systems and public indicators—for example, the Famine Early Warning Systems Network (FEWS NET) and the WHO’s Global Health Observatory, which tracks indicators such as the maternal mortality ratio, care seeking for children with acute respiratory infection, the universal health care service coverage index, and household ability to pay for health care. These can serve as proxies for when formal systems are failing to meet needs, signaling rising pressure on households. The design challenge is governance: Triggers must be transparent, non-politicalized, and agreed in advance by borrowers and creditors.

b. Borrower coordination and transparency

While creditors coordinate through formal clubs, borrowers largely negotiate alone—an asymmetry that entrenches power imbalances in restructurings. Establishing borrower clubs could strengthen collective bargaining power, improve transparency, share intelligence, and set common thresholds to protect social infrastructure. Such coordination is also about accountability. Creating a venue to document the actions of creditors and their advisors helps countries learn from one another and make harmful restructuring templates harder to reproduce. Over time, such coordination could elevate debt issues and enhance scrutiny of unjust legacy debts across a range of constituencies, including in such forums as budget transparency projects, public financial management circles, and even feminist foreign policy debates.

Country coordination can extend beyond restructuring itself by aligning on transparency standards not just for debt reduction but also to curb capital flight and tax competition. When they coordinate, borrower countries can reduce the leverage that mobile wealth holds over fiscal policy and protect the revenue base needed to finance social infrastructure. This makes it harder for creditors, corporations, and high-net-worth individuals to play countries off one another. Country coordination may also improve transparency, especially of debt held by private creditors. Countries can take an aligned approach when they pass domestic legislation that limits the scope of confidentiality clauses in their agreements with private creditors, requires parliamentary oversight, and invalidates unreasonable secrecy provisions. Transparency frameworks require public disclosure not only of debt obligations and contracts, but also of how borrowed funds are actually spent.

c. Updating debt sustainability frameworks

In post–FfD conversations, there is a clear appetite for reforming debt sustainability analyses (DSAs). At a minimum, DSAs should better distinguish liquidity from solvency problems, fully account for domestic as well as external debt, and reflect public assets and the long-run returns of growth-enhancing investments—not just liabilities. Today’s frameworks judge countries by their capacity to repay (which many finance ministers prioritize), overlooking the critical financing needs for sustainable development and climate action and pushing them to “default” on their development and climate goals.

Commentators concur that a reformed DSA should be more sensitive to external shocks and climate vulnerabilities, treat debt management as enabling productive investment rather than debt reduction, and address “hidden debt” through stronger transparency. A loan-by-loan sovereign debt registry could act as a record of public borrowing—including key contract terms and collateral—publicizing hidden liabilities and strengthening transparency. Proposals for a global public registry have been advanced by civil society and researchers, and existing systems like the World Bank’s Debtor Reporting System show that loan-level reporting is feasible, but coverage and public disclosure remain incomplete.

Beyond these recommendations, a reformed DSA should include valuation of unpaid care work and gendered asset ownership in assessments of national net worth, building on established efforts to improve national accounting systems. Tools already exist. For example, the ILO guidance on measuring unpaid work, various UN Women toolkits, and the Demographic and Health Survey (DHS) modules that capture sex-disaggregated asset ownership, could be incorporated into updated DSA methodologies.

d. Special Drawing Rights (SDRs) reform

The idea of using Special Drawing Rights (SDRs) as a development finance lever has circulated for decades. The idea gained momentum after the 2008 financial crisis, when the Stiglitz-led U.N. Commission highlighted SDR-based reforms. It accelerated again in 2021 after the International Monetary Fund’s (IMF) historic allocation through the Resilience and Sustainability Fund, which rechanneled SDRs to countries in crisis, and once more moved to center stage in the wake of cuts in development assistance that took place during the FfD process. SDRs are an IMF-issued reserve asset that countries can hold and—if needed—exchange for hard currency. Since allocations follow IMF quota rules, most SDRs sit with high-income economies that often do not need them. One recommendation is for donors to channel SDRs (or a portion thereof) to regional development banks, which have the systems but lack the capital to deploy long-maturity, low-cost financing at scale. If structured well, this approach can expand fiscal space for high-return public investments in health systems, education, and care infrastructure. An additional benefit is that this approach would not push countries toward higher-cost commercial borrowing or worsen near-term rollover and foreign-exchange risks.

II. National-level fiscal reforms

Global reforms will take time. In the interim, countries must strengthen domestic resource mobilization, particularly as aid flows decline. The coming decade has been described as the “tax era for development.” However, revenue mobilization is only one side of the equation; how revenue is spent matters just as much.

a. Expenditure switching

Governments can expand fiscal space through expenditure switching: phasing down inefficient subsidies—especially fossil fuel subsidies and preferential treatment for large landowners and mineral-extractive firms—again  reallocating those resources toward physical and social infrastructure. Because these subsidies often generate limited growth benefits and substantial leakage (particularly when recipients are import-intensive), shifting spending toward productivity- and resilience-enhancing investments can raise medium-term growth, create decent jobs, and strengthen future revenue bases. Pairing subsidy reform with social protection and human development investments can be a practical way to reduce political backlash.

• Morocco (2014–present): Morocco ended gasoline and fuel oil subsidies² and began cutting diesel subsidies, creating fiscal space that supported a broader pivot toward renewable energy and sustainable employment—an approach that could be strengthened further by treating care investments as core transition infrastructure, especially since these jobs have high multipliers.
• Egypt (2016–2020)³: After energy subsidies had grown to exceed combined spending on health, education, and infrastructure, Egypt raised electricity tariffs and fuel prices as part of a broader reform package, while also increasing social protection allocations by about 60% especially for two flagship programs: Takaful, a conditional cash transfer linked to school attendance and the use of maternal and child health services, and Karama, an unconditional monthly transfer for poor older people and people with severe disabilities.

b. Countercyclical spending

When public investment is well-designed, it can stabilize economies during recessions. But the benefits of expansionary public investment extend beyond GDP. By strengthening social reproduction, the activities which sustain daily life and human capabilities, and reducing the burdens on unpaid care and domestic work, it can prevent the erosion of well-being and productivity that typically accompanies downturns through unemployment, deprivation, and disrupted access to essential services. This perspective aligns with the move away from procyclical tightening and toward countercyclical fiscal policy—a shift recognized by economists, the IMF, and policymakers. Countercyclical spending not only cushions recessions but also attenuates long-term economic scarring—known as hysteresis—by protecting employment, social protection, health, and education.

Beyond the above effects, countercyclical spending should also be understood as a tool for safeguarding gender-equality gains—especially given macroeconomic evidence that falling barriers to gender equality have contributed meaningfully to long-run growth. As COVID-19 underscored, women’s socially assigned roles often make them the first responders to crises at the household level—managing health, education, and food security—while they are also disproportionately employed in frontline sectors such as health, education, and social care. Protecting these systems and targeting women during downturns can therefore stabilize women’s and household incomes, reduce unpaid care burdens, and avert longer-run losses in human capital. Evidence from Argentina’s Emergency Family Income (IFE) program is illustrative: Using a difference-in-differences design comparing eligible women to non-eligible women, one study finds that after the IFE rollout, women’s share of couple income rose by about 8% and their share of household income by about 11%, while the probability that women were solely responsible for household chores fell by about 4%. Beyond cash transfers and adaptive social protection, countercyclical packages can help maintain access to maternal and newborn care during shocks, provide early childhood care, keep girls in school, and sustain gender-based violence prevention and response services, among other policy priorities.

c. Progressive tax systems

As a growing group of economists argues, progressive taxation of wealth and capital income is increasingly feasible, even in low-income contexts. But equal attention should be paid to reducing the regressivity of existing systems. Consumption taxes and informal sector levies often fall disproportionately on poor households and female workers. Governments can mitigate these effects through improved targeting, greater transparency, and better tax design and administration. Emerging innovations in public finance demonstrate that equity and efficiency need not be traded off.

Conclusion

This commentary has discussed three paradigm changes for the way analysts and policymakers think about debt and public finance. It has also outlined several practical steps to operationalize a new approach to public finance. Incorporating a gender equality lens shows how this paradigm change and concrete reforms can be more inclusive and longer-lasting, as well as help countries weather potential shocks in the years ahead.