The International Monetary Fund (IMF) has raised concerns about the impact of rising US national debt on global economic stability. Reports from the recent annual spring meetings suggest that the escalating US fiscal deficit, projected to surpass $1 trillion by 2021, might pose a significant risk to economic balance worldwide.
IMF research warns of a potential crisis more severe than the 2008 financial setback. This situation primarily stems from easy access to inexpensive capital and increased governmental debt in the United States, further driven by the COVID-19 pandemic and consequent economic recovery packages.
On the one hand, debt can provide crucial liquidity in crisis times, stimulating demand. Still, improper management can lead to a harmful spiral of growing interest payments and greater economic vulnerability.
Advanced economies, including emerging markets and low-income developing countries, have been hit hard.
Impact of mounting US debt on global stability
IMF’s top economist Pierre-Olivier Gourinchas underlines that high US debt not only risks national fiscal stability but jeopardizes global economies.
Beyond the US, the IMF is apprehensive about mounting debt in nations like Italy, the UK, and China, expressing a critical need for policy reforms. Therefore, international cooperation is vital to avert a systemic financial crisis.
IMF’s Fiscal Monitor report predicts a worrying picture for the US economy. The forecasted fiscal deficit of 7.1% of GDP in 2023, up from 4.1% in 2022, suggests an urgent requirement to balance expenditure and revenue. Failure to act could lead to increased national debt, strained public finances, and decreased economic stability.
IMF advises that reducing expenditures and implementing entitlement reforms could help tackle this issue. Strengthening public finances could mitigate future crises, whereas failure to do so might trigger significant fiscal adjustments and unwanted financial implications.
