The International Monetary Fund recently warned that the excessive fiscal deficit and debt scale of the United States are posing a growing risk to its own and the global economy, urging the US to solve this long-standing problem as soon as possible.
That the IMF bluntly warned its largest shareholder and leading player shows the gravity of the situation. In its report, the IMF said the chronic fiscal deficit reflected significant and persistent policy misalignment by the US government. If the US continues with its current policies, its public debt will exceed 140 percent of the GDP by 2032. The US should reduce the proportion of government debt to the GDP through a series of policies, including raising taxes and addressing structural imbalances in the economy.
The total debt of the US federal government has reached $34.72 trillion, which means a debt of $103,000 per US citizen. According to a recent report released by the Congressional Budget Office, the US federal government budget deficit in fiscal year 2024 has increased by 27 percent compared with the previous forecast and the cumulative fiscal deficit forecast for the next decade has also been significantly increased. This means the US federal government debt will continue to grow for a long period of time. Considering the current higher interest rates, the net interest payment of the US debt is expected to reach about $1 trillion in fiscal year 2028, which is unsustainable, especially as the US debt is growing faster than its economic growth rate.
At present, there are concerns that once there is consensus the US fiscal deficit cannot sustain, it will take a toll on market confidence. The market is concerned that the collapse of US treasuries is becoming a growing “tail risk”, under the impact of factors such as the presidential election and economic recession.
First, the US has entered election season and uncertainty about the future of the US economy has also increased. If a new US administration imposes tariffs on all imports, the current high level of inflation in the US will continue, which, if accompanied by further tax cuts, would weaken its fiscal capacity and eventually lead to a vicious circle of higher interest payments on federal debt and greater reliance on debt.
Second, in the current context of high interest rates in the US, economic growth is largely powered by fiscal spending. However, as the scale of interest payments continues to rise and the US economy loses steam, its ability to invest will decline predictably, depriving the US economy of an important growth driver.
As bipartisan political turmoil has weakened the US’ ability to address debt risks, its debt risk will also become more prominent and impending.
-21st Century Business Herald