IMF Warns of Significant Threat to Global Economy from U.S. Fiscal Deficit in 2024

The IMF warns that the U.S. fiscal deficit poses a major risk to the global economy in 2024, urging the U.S. to raise revenues and reform costly programs to reduce deficits and avoid debt ceiling crises.

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Hadeel Hashem
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IMF Warns of Significant Threat to Global Economy from U.S. Fiscal Deficit in 2024

IMF Warns of Significant Threat to Global Economy from U.S. Fiscal Deficit in 2024

The International Monetary Fund (IMF) has issued a sobering caution that the United States' ballooning fiscal deficit presents a major risk to the global economy in 2024. In its latest Fiscal Monitor report, the IMF projects that the U.S. deficit will reach an alarming 7.1% of its gross domestic product (GDP) next year, more than triple the average level of around 2% for other developed economies.

IMF First Deputy Managing Director Gita Gopinath stressed the urgency of the situation, stating that the U.S. needs to raise revenues to bring down its high budget deficits, even though they are currently helping to drive global growth by stoking domestic demand. "The IMF's fiscal monitor estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025, which is double the 3.5% number in 2015," Gopinath said.

The report underscores that the large-scale U.S. spending could have far-reaching implications for the global economy and create risks for other nations. Pierre Olivier Gourinchas, the IMF's economic counselor and director of research, noted that the U.S. fiscal situation is particularly worrying and complicates the Federal Reserve's response to high inflation.

Why this matters: The potential long-term impact of the U.S. fiscal deficit on the global economy is significant. A sudden and sharp rise in U.S. interest rates could lead to a surge in global government bond yields and currency exchange rate fluctuations in emerging markets and developing economies, as U.S. borrowing costs are closely tied to global markets.

The IMF's upcoming annual 'Article IV' review of U.S. economic policies is expected to recommend that the U.S. raise tax revenues and reform its costly Social Security and Medicare programs to reduce deficits. Gopinath also stressed the importance of the U.S. finding a way to approve government funding without the recurring risk of debt ceiling brinkmanship, which she described as a risk that "nobody needs to have to deal with."

The IMF report calls for immediate action to address the crisis, including terminating crisis-era support measures and resisting the drive to further increase spending. It projects that global public debt will reach close to 99% of GDP by 2029, driven primarily by policies in the U.S. and China. While President Biden has proposed a plan to cut $3 trillion from the deficit over 10 years by increasing taxes on the wealthy and corporations, concerns persist over the nation's spending and debt levels.

Key Takeaways

  • IMF warns US fiscal deficit to reach 7.1% of GDP in 2024, triple OECD average.
  • IMF urges US to raise revenues to reduce high budget deficits fueling global growth.
  • US fiscal situation complicates Fed's response to inflation, poses risks to global markets.
  • IMF expects global public debt to reach 99% of GDP by 2029, driven by US and China.
  • Biden proposes $3 trillion deficit reduction plan, but concerns persist over US spending.