Soaring US debt poses risks to global economy, IMF warns

U.S. government budget deficits and rising debt pose a growing risk to the global economy, spoiling an otherwise excellent economic performance, the International Monetary Fund said Thursday.

The United States faces an urgent need in the coming years to reduce its debt burden, which could require widespread income tax increases and cuts to popular social programs, the Fund said. at the end of its annual review of the American economy.

The required fiscal adjustment will require difficult policy decisions over several years, the fund said, warning that an uncontrolled increase in debt could ultimately undermine U.S. growth and lead to global financial distress.

This is the right time, said Kristalina Georgieva, the fund's managing director. The U.S. economy is very strong, and it's in good times that you can do more to prepare for future risks.

President Biden has ruled out at least one of the funds' suggested remedies: higher taxes on people making less than $400,000 a year.

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But beyond the debt, the IMF has praised the remarkable performance of the American economy in recent years. Inflation has been largely controlled without unemployment soaring as many economists had anticipated. Growth in gross domestic product (GDP) remains above expectations and is expected to continue.

The United States is the only G20 economy whose GDP level now exceeds the pre-pandemic level. This is a good thing for the United States and for the global economy, Georgieva told reporters.

Despite the increase in American debt, the financial markets remain calm. The yield the government must offer to entice investors to buy 10-year Treasury notes hovers around 4.2%, below typical rates before the Great Recession.

The U.S. economy is also attracting a growing share of global capital, according to Georgieva. Before the pandemic, 18 percent of funds invested outside national borders were placed in the United States. Today, the U.S. share of mobile finance is 33 percent, she said.

Debt and deficits will be a major challenge for the next president. By early 2025, Congress will have to raise the statutory debt ceiling or the United States will default. Lawmakers will also have to decide by the end of 2025 whether to extend Trump’s 2017 tax cuts or let them expire, raising taxes for most Americans.

In April, in a separate review, IMF officials criticized the United States for its fiscal deficits that boosted the economy, saying they actually made it harder for the Federal Reserve to cut interest rates.

On Thursday, citing potential upside risks to inflation, the IMF said the Fed should wait to cut interest rates until at least the end of 2024.

Hours before her news conference at the fund's headquarters, Georgieva met with Treasury Secretary Janet L. Yellen to discuss the review.

Thursday’s IMF statement is just the latest warning about the U.S. debt situation. On Tuesday, the Organization for Economic Cooperation and Development said that increasing debt at a time of higher interest rates will limit the U.S.’s ability to meet other needs, including defense, an aging population and future economic shocks.

Years of repeated tax cuts have reduced the government's revenue base at a time when it faces growing spending commitments for programs such as Social Security and Medicare, as well as interest on the rise, the OECD said.

According to the Congressional Budget Office, corporate tax payments today are less than half of what they were in 1967. Interest spending on the national debt has doubled during the same period to 2.4% of gross domestic product.

The OECD, a group of more than three dozen advanced economies, has called for a sustained but steady multi-year fiscal effort to reduce debt. Only Italy, Greece and Japan have higher gross debt-to-GDP ratios, the OECD said in its annual assessment of the U.S. economy.

Publicly held government debt, which excludes Social Security Trust Fund Treasury securities, is equivalent to 99% of total U.S. output and is expected to reach 122% in 2034, according to the CBO.

Many economists believe that the growing burden of public debt must be addressed through a combination of spending cuts and tax increases. Stabilizing the debt relative to the size of the economy is a really important goal, Jared Bernstein, chairman of the White House Council of Economic Advisers, told the Brookings Institution this week.

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