The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose 'significant risks' for the global economy

The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose 'significant risks' for the global economy.

The International Monetary Fund (IMF) stated in its benchmark Fiscal Monitor that it anticipates the US to record a fiscal deficit of 7.1 percent next year—more than three times the 2 percent average for other advanced economies.

The IMF also expressed concerns about Chinese government debt, with China expected to record a deficit of 7.6 percent in 2025—more than double the 3.7 percent average for other emerging markets—as Beijing grapples with weak demand and a housing crisis.

The US and China were among four countries identified by the IMF as "critically needing to take policy action to address fundamental imbalances between spending and revenues." The other two countries mentioned were the UK and Italy.

The IMF warned that excessive spending by the US and China could "have profound effects for the global economy and pose significant risks for baseline fiscal projections in other economies."

The assessment comes amid growing concerns among economists and investors that 2025 will prove to be a challenging year for US fiscal policy.

The presumptive Republican presidential nominee, Donald Trump, has pledged to make his 2017 tax cuts permanent, a move expected to cost $5 trillion over the next decade according to the Committee for a Responsible Federal Budget. Democrats have been criticized by Republicans and economists for not doing enough to cut "discretionary spending" on healthcare and social security.

IMF chief economist Pierre-Olivier Gourinchas stated that the US's fiscal position is "of particular concern," suggesting that it could complicate the Federal Reserve's efforts to bring inflation back to its 2 percent target.

The IMF highlighted that governments' debt burdens have surged due to high spending during the early stages of the pandemic and significant increases in global borrowing costs as central banks seek to combat high inflation.

The Congressional Budget Office reported that the US's federal debt totaled $26.2 trillion, or 97 percent of gross domestic product (GDP), at the end of last year. The independent fiscal watchdog expects it to reach 116 percent of GDP in 2029, matching a previous post-World War II high.

In contrast, fiscal deficits in other advanced economies, such as the eurozone, were constrained during 2023.

However, the IMF noted that the US experienced "remarkably large fiscal slippages," with the fiscal deficit reaching 8.8 percent of GDP last year—more than double the 4.1 percent deficit recorded for 2022.

The IMF also stated that the US's fiscal deficit contributed 0.5 percentage points to core inflation, which means that US interest rates would need to remain higher for longer to bring inflation back to the Fed's 2 percent target.

The CBO predicts that net interest payments to holders of US debt will exceed $1 trillion after 2026.