‘Something will have to give,’ the IMF warned of high deficit spending and the risk that it could spiral further out of control in an election year.
The International Monetary Fund (IMF) has sounded the alarm on the Biden administration’s high deficit spending, warning that its fiscal stance and ballooning public debt threaten to stoke inflation and possibly even spark financial chaos.
“The fiscal stance, out of line with long-term fiscal sustainability, is of particular concern,” IMF economists wrote in a recent
blog post, which accompanied the release of the group’s latest editions of the its
Fiscal Monitor and its
World Economic Outlook Report, which both warn of acute risks to public finances in an election year in which much of the political discourse is loudly in favor of fiscal expansion.
Deficit spending in the United States last year hit $1.7 trillion in 2023, or 6.3 percent of gross domestic product (GDP), according to a
recent report from the Congressional Budget Office (CBO), which
warned that deficit spending that adds to a growing pile of public debt would slow economic growth and drive up interest payments to foreign holders of U.S. debt.
Over the next 30 years, U.S. deficit spending is expected to grow to 8.5 percent of GDP by 2054, per
CBO estimates. The agency also projects that the total public debt-to-GDP ratio, which in the 1980s was around 35 percent of GDP, will balloon to 166 percent by 2054, posing “significant risks” to America’s fiscal and economic outlook.
Treasury Department data
released earlier in April show that the U.S. budget deficit topped $1 trillion in the first six months of fiscal year 2024, putting the federal government on track to notch its fifth consecutive trillion-dollar-plus budget gap.
Republicans have repeatedly expressed opposition to high deficit spending, while President Joe Biden has called out the GOP for pushing budget cuts and
tried to pin the blame for catapulting the public debt to over $34 trillion on President Donald Trump’s tax cuts.
With its latest report, the IMF is siding with the voices of fiscal restraint.
‘Something Will Have To Give’
The IMF has taken notice of America’s ballooning debt and added its voice of concern, warning that the Biden administration’s spending levels are unsustainable and could push the economy to breaking point.
“It raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” IMF economists wrote in their post. “Something will have to give.”
The warning comes in an election year, during which fiscal policy tends to be looser and fiscal slippages larger. Already, loose fiscal policy and rising debt levels have contributed to a jump in the yields of long-term U.S. government securities, as well as to heightened market volatility.
The IMF warns that the Biden administration may be tempted to further extend fiscal support, especially in case of renewed supply disruptions and price shocks. However, the agency warns against giving in and recommends restraint.
“Durable and credible fiscal consolidation is needed to reestablish sound public finances, to build budgetary space for priority investments, and to deal with future shocks,” the group wrote in the foreword to its latest Fiscal Monitor.
“Tackling debt and deficits today helps to avoid more painful adjustments later,” the report’s authors continued, adding that, “fiscal tightening would also be an important contribution to completing the last mile of disinflation,” especially in economies characterized by excess demand like the United States, whose economy the IMF described as “overheated.”
Relentless Spending Could Trigger ‘Drastic’ Tax Increases
The IMF report and blog post commentary broadly dovetails with a
warning issued several months ago by the U.S. Government Accountability Office (GAO), which noted that the federal government’s long-term fiscal path is “unsustainable” and poses “serious” challenges to economic and national security, as well as to social cohesion more broadly.
“We have reviewed the government’s bookkeeping and continue to find weaknesses that undermine its reliability,” GAO wrote in a note in mid February.
The agency warned that rising debt increases the risk of a fiscal crisis, noting that if investors lose confidence in America’s fiscal management, this could force “drastic” tax increases and cuts to critical spending.
“Congress and the administration must act to move the nation off the untenable long-term fiscal course on which it is currently,” Gene L. Dodaro, Comptroller General of the United States and head of the GAO, said in a statement.
“The federal debt level is growing at a rate that threatens the vitality of our nation’s economy and the safety and well-being of the American people.”
Other similar warnings have been issued by prominent economists and business leaders, with JPMorgan CEO Jamie Dimon recently cautioning that the impacts of major economic and geopolitical forces—from high levels of debt and fiscal stimulus, to the wars in Ukraine and the Middle East—could deliver nasty surprises to markets.
He said that the risks confronting Americans today may well be the worst since World War II, while warning of higher-for-longer rates of inflation along with other downside risks that could well dash market expectations for an economic “soft landing.”
“There seems to be a large number of persistent inflationary pressures, which may likely continue,” Mr. Dimon wrote in his
annual letter to shareholders, in which he said that investors may be overlooking risks as they navigate today’s complex and dangerous world.
“We may be entering one of the most treacherous geopolitical eras since World War II,” Mr. Dimon wrote, while urging investors to plan for a very broad range of interest rates, from 2 percent to as high as 8 percent or even more.
