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The International Monetary Fund has warned the United States that its huge fiscal deficit has led to increased inflation and poses “significant risks” to the global economy.
The Fund said in its benchmark fiscal monitoring report that it expects the United States to record a fiscal deficit of 7.1 percent next year – more than three times the average of 2 percent for other advanced economies.
It also raised concerns about Chinese government debt, with the country expected to post a deficit of 7.6 percent in 2025 – more than double the 3.7 percent average for other emerging markets – as Beijing deals with weak demand and a housing crisis.
The United States and China were among four countries described by the Fund as “urgently in need of policy action to address fundamental imbalances between spending and revenues.” The other countries were the United Kingdom and Italy.
The IMF said excessive spending by the United States and China in particular could have “profound impacts on the global economy and pose significant risks to fundamental fiscal outlooks in other economies.”
This assessment comes amid growing concerns among economists and investors that 2025 will prove to be a critical year for US financial policy.
Presumptive Republican presidential nominee Donald Trump has pledged to make his 2017 tax cuts permanent, a move the Committee for a Responsible Federal Budget expects to cost $5 trillion over the next decade. Republicans and economists accused Democrats of doing little to reduce “discretionary spending” on Medicare and Social Security.
Pierre-Olivier Gorinchas, the International Monetary Fund's chief economist, said on Tuesday that the US fiscal situation was “particularly worrying,” suggesting it could complicate the Federal Reserve's attempts to return inflation to its 2 percent target.
He added: “It increases the short-term risks of the inflation deceleration process, as well as the long-term financial and financial stability risks of the global economy.” “And something has to give.”
Government debt burdens rose after spending surged during the early stages of the pandemic and sharp increases in global borrowing costs as central banks sought to tame the worst bout of inflation in decades.
The Congressional Budget Office said the US federal debt pile amounted to $26.2 trillion, or 97 percent of gross domestic product, at the end of last year. The independent financial watchdog expects it to match its previous post-World War II high of 116 percent in 2029.
In other advanced economies, such as the eurozone, fiscal deficits have been curbed through 2023.
But the IMF said the United States showed “remarkably large fiscal slippages,” with the fiscal deficit reaching 8.8 percent of GDP last year — more than double the 4.1 percent deficit figure recorded for 2022.
The IMF said the country's fiscal deficit contributed 0.5 percentage points to core inflation – a measure of core price pressures that excludes energy and food. This means US interest rates will need to stay higher for longer to bring inflation back to the Fed's 2 percent target.
The CBO already believes the bill for net interest payments to US debt holders will exceed $1 trillion after 2026.
The IMF noted that “large and sudden increases” in US borrowing costs typically lead to rises in government bond yields around the world and exchange rate disturbances in emerging market and developing economies.
The Fund's analysis concluded that a 1 percentage point rise in US interest rates led to a 90 basis point rise in other advanced economies and a 1 percentage point increase in emerging markets.
The International Monetary Fund said: “The indirect repercussions of global interest rates could contribute to tightening financial conditions and increasing risks elsewhere.”
She added that Chinese government debt, unlike US Treasuries, tends to be held domestically, so a sharp rise is unlikely to affect global markets in the same way. But the IMF said the country's debt dynamics were still affecting its trading partners.
“A slower-than-expected growth slowdown in China, potentially exacerbated by unintended fiscal tightening given significant fiscal imbalances in local governments, could generate negative spillover effects on the rest of the world through lower levels of international trade, external financing and investment.” He Said.
Vitor Gaspar, chief fiscal policy officer at the International Monetary Fund, said the economic strength of both the United States and China means they have enough time to get their finances under control. He said the two governments have more fiscal space than their counterparts, giving them “more room to maneuver to correct and control.”
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