High U.S. deficit poses risks to global economy, but spending cuts won't be easy

WASHINGTON, April 25 (Xinhua) -- With the U.S. government showing no sign of containing its spending in an election year, economists and observers have warned that high U.S. deficit poses risks to the U.S. and global economy.

First Deputy Managing Director of the International Monetary Fund (IMF) Gita Gopinath said that while high deficits are supporting growth in the United States and globally, there is a downside.

"Along with that growth, you're getting higher interest rates and a stronger dollar and the second two are creating more complications for the world," Gopinath told the recent IMF and World Bank Spring Meetings.

IMF chief economist Pierre-Olivier Gourinchas, meanwhile, labeled the U.S. deficit as an issue of "particular concern."

In an interview with Xinhua, Vitor Gaspar, director of the IMF's fiscal affairs department, noted that the year 2023 was "particularly remarkable" for the United States in terms of loose fiscal policy.

"In 2023, the cyclically adjusted primary deficit shifted from 1.9 percent of GDP in 2022 to 5.7 percent of GDP, it was multiplied by almost three during one single year," he said.

According to its latest Fiscal Monitor, the IMF predicted the U.S. fiscal deficit would hit 7.1 percent of GDP by 2025. Before the pandemic, it was 5.8 percent in 2019. U.S. government debt is on track to reach 126.6 percent of GDP in 2025.

"Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar," Gaspar told reporters at a recent press briefing.

"It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks," he said.

Desmond Lachman, a senior fellow at the American Enterprise Institute, told Xinhua that the IMF is right to warn that failure to address the deficit issue in a timely manner will have adverse consequences for the long-term U.S. economic growth outlook, and it could also have the adverse effect of "inviting a dollar crisis."

"Still being the world's largest economy, trouble in the U.S. economy could spill over to the rest of the world," said Lachman, who is also a former official at the IMF.

There is no question that the U.S. public finances are on an unsustainable path, he said. "At a time of cyclical strength, the country is running a budget deficit equivalent to over 6 percent of GDP and has a public debt to GDP ratio of around 100 percent."

Barry Bosworth, economist and senior fellow at the Brookings Institution, told Xinhua that although strong U.S. growth is a major support to an otherwise weak global economy, the deficit is becoming increasingly costly to Americans facing rising interest costs of the public debt.

Interest costs in the first half of this fiscal year have already totaled 429 billion U.S. dollars and are projected to reach 870 billion dollars for the full year. At this level, interest payments will surpass spending on both defense and Medicare this year and rise to become the second-largest line item in the budget, according to the Committee for a Responsible Federal Budget, a budget watchdog group.

The United States needs to scale back spending and raise taxes, Bosworth said, adding that some of the fiscal restraint can be offset by an easing of monetary policy.

However, U.S. Fed Chair Jerome Powell recently signaled that policymakers would wait longer than previously anticipated to cut rates following higher-than-expected inflation readings, which means monetary easing won't come until later this year.

The Congressional Budget Office (CBO) is warning that based on present policies, the deficit will remain at around its present level for as far as the eye can see and that as a result, the debt level will soon exceed that which prevailed at the end of the Second World War, Lachman noted.

If the current level of spending continues unabated, the nonpartisan CBO estimates that debt held by the public will continue to grow and reach 166 percent of GDP in 30 years, up from 99 percent of GDP in 2024.

"That mounting debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices," the CBO said in its latest Long-Term Budget Outlook released in March.

Heated discussions on the U.S. deficit and debt occur in the lead-up to November's presidential elections, at a time when critics say neither candidate has a feasible plan to lower the deficit.

Indeed, presumptive Republican presidential nominee Donald Trump has vowed to make permanent the tax cuts he enacted during his term in office. Some experts fear this could contribute to a much bigger deficit if the former president is re-elected in November.

According to the Penn Wharton Budget Model, permanently extending the 2017 Trump tax cuts would cost about 1.2 percent of GDP each year starting in the late 2020s.

At the same time, many economists bill President Joe Biden's massive spending as profligate.

Peter G. Peterson Foundation, a nonpartisan organization dedicated to addressing the U.S. long-term fiscal challenges, noted that the country's long-term fiscal imbalance is caused by the structural mismatch between spending and revenues.

"Federal spending -- driven by rising healthcare costs, demographics, and interest payments on the national debt -- outpaces revenues that are insufficient to meet commitments that have been made," the foundation said in a blog Wednesday.

"Decreasing the nation's debt and deficits requires addressing those larger, fundamental drivers over the long term," it said.

Even U.S. Treasury Secretary Janet Yellen told lawmakers in February that she believes "we need to reduce deficits and to stay on a fiscally sustainable path." Powell said earlier this year that it was "probably time -- or past time" for politicians to get the federal government back on a sustainable fiscal path.

But with a divided Congress and a looming election, spending cuts would be no easy feat.

"The current political environment is particularly challenging, because fiscal expansion is dominating the political discourse," Gaspar said, calling for a durable and credible fiscal tightening to safeguard public finances.