Stay informed with free updates
Simply sign up for Global Economy myFT Digest and get it delivered straight to your inbox.
The IMF has warned the United States that its large budget deficits are causing inflation and posing “significant risks” to the global economy.
In its benchmark fiscal monitor, the fund said it expects the U.S. to record a budget deficit of 7.1% next year, more than three times the 2% average for other developed countries. .
There are also concerns about Beijing’s debt as it grapples with weak demand and a housing crisis, with the country expected to post a 7.6% deficit in 2025, compared to other emerging economies. This is more than twice the average rate of 3.7%.
The United States and China were among the four countries the fund said “need to take policy action to address fundamental imbalances in spending and revenues.” The others were England and Italy.
Rampant spending, particularly by the United States and China, “could have significant implications for the global economy and pose significant risks to other countries’ fundamental fiscal projections,” the IMF said.
The assessment comes amid growing concern among economists and investors that 2025 could be a critical moment for U.S. fiscal policy.
Republican presidential candidate Donald Trump has promised to make the 2017 tax cuts permanent, and the Committee for a Responsible Federal Budget think tank predicts they will cost $5 trillion over the next decade. Democrats have been criticized by Republicans and economists for cutting too little “discretionary spending” on health care and Social Security.
IMF Chief Economist Pierre-Olivier Grinchat said on Tuesday that the U.S. fiscal situation is “particularly concerning” and will complicate the Federal Reserve’s efforts to return inflation to its 2% target. suggested that it was possible.
“It increases not only the short-term risks to the deflation process but also the long-term fiscal and financial stability risks to the global economy,” he said. “Something’s gonna have to give.”
Government debt burdens have soared following high spending in the early stages of the pandemic and sharply rising global borrowing costs, as central banks seek to rein in the worst inflation in decades.
The Congressional Budget Office announced that the United States’ federal debt had reached $26.2 trillion at the end of last year, equivalent to 97% of gross domestic product (GDP). The independent financial watchdog expects it to match the post-World War II high of 116% in 2029.
Other developed countries, such as those in the euro zone, have brought their budget deficits under control by the end of 2023.
But the IMF said the US was exhibiting “significant fiscal lag”, with the budget deficit reaching 8.8% of GDP last year, more than double the 4.1% deficit recorded in 2022. Ta.
The IMF said the country’s budget deficit contributed 0.5 percentage points to core inflation, a measure of underlying price pressures excluding energy and food. That means U.S. interest rates will need to stay high for a longer period of time to bring inflation back to the Fed’s 2% goal.
CBO already believes the net interest bill to Treasury holders will exceed $1 trillion after 2026.
The IMF said a “significant and sudden increase” in U.S. borrowing costs would generally lead to sharp increases in bond yields around the world and exchange rate disruptions in emerging market and developing countries.
According to the fund’s analysis, a 1 percentage point increase in U.S. interest rates led to a 90 basis point increase in other developed countries and a 1 percentage point increase in emerging markets.
“Global interest rate spillovers could lead to tightening of financial conditions and increase risks in other regions,” the IMF said.
He added that Chinese government debt, unlike U.S. debt, tends to be held domestically, making a sharp rise unlikely to have the same impact on global markets. However, the fund argued that the country’s debt trends could still weigh on its trading partners.
“China’s faster-than-expected growth slowdown could be further exacerbated by unintended fiscal tightening in light of significant fiscal imbalances in local governments, which could lead to lower levels of international trade, external financing, and investment in the rest of the world. may have a negative impact.”
Vitor Gaspar, the IMF’s head of fiscal policy, said the economic strength of both the United States and China meant they had time to get their finances under control. Both governments have more fiscal space than their peers, giving them “room for maneuver to correct and control,” he said.
Letter in response to this article:
It’s worth remembering how Clinton achieved a budget surplus / William W. Chipp, Washington, DC, USA
