Steady Growth Amid Fiscal Challenges
In its Fiscal Monitor report, the IMF noted that while the global economic outlook appears to be stabilising, fiscal policy continues to grapple with the lingering effects of high debt and deficits while simultaneously facing new challenges.
The report highlighted that public finance risks have risen this year (as over 80 economies and economic areas are holding elections) amid growing support for increased government spending. Financing conditions remain challenging yet the pressures to allocate spending towards addressing structural challenges are becoming more urgent. The Fund advised that countries should aim to boost long-term economic growth through a well-designed fiscal policy mix that promotes innovation more broadly, including fundamental research, and facilitates the diffusion of technology. The IMF advises countries to promote innovation, facilitate technology diffusion and undertake sustained fiscal consolidation to safeguard sustainable public finances and rebuild fiscal buffers.
Of particular concern is the US's ballooning fiscal deficit, which the IMF has projected to reach a record 7.1% of GDP in 2025 (which is over three times that of the average of advanced economies). This raises risks to the disinflation process and longer-term fiscal and financial stability.
Moreover, in February the Congressional Budget Office (CBO), the US’s official government forecaster, said the US budget deficit will surge by nearly two-thirds to USD 2.6tn over the next decade driven primarily by higher interest costs on government debt. As the Federal Reserve aggressively hiked rates to quell inflation, yields on Treasuries have spiked raising the government's borrowing expenses substantially. Interest payments are expected to soar from around current defence spending levels to 1.5 times that by 2034. Furthermore, total public debt is forecasted to exceed 100% of GDP in 2025 and reach 116% by 2034.
The IMF acknowledges that the US has more fiscal room for manoeuvre than some of its counterparts. We, however, believe the political polarisation casts doubt on the prospects of significant tax hike proposals to bridge the spending-revenue chasm.
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