Debt, Deficits And Spillovers: The IMF’s View On US Fiscal Policy

When the International Monetary Fund conducts its regular Article IV consultations with member countries, the resulting reports often attract limited attention outside policy circles. The United States is an exception. As the issuer of the world’s main reserve currency and home to the deepest capital markets, US policies have global implications. In that context, the IMF’s renewed focus on US fiscal sustainability is more than a technical exercise.

Over the past decade, US federal deficits have remained high in both good times and bad. After the exceptional spending during the pandemic, some reduction was expected, but structural factors have kept deficits wide. Tax cuts, demographic pressures on entitlement programs and a political environment that makes revenue raising difficult have all contributed. Projections from independent budget offices suggest that, absent policy changes, public debt held by the public could climb steadily as a share of GDP in the coming decades.

From a purely domestic perspective, one might argue that the United States can tolerate higher debt than most countries. It borrows in its own currency, has a large and diversified economy and benefits from strong demand for its safe assets. Interest rates have been low by historical standards for much of the recent period, reducing the immediate burden of servicing debt.

The IMF’s concern is not about an imminent crisis but about long term risks and global spillovers. If markets begin to question the sustainability of US fiscal policy, they could demand higher risk premia, pushing up yields on Treasury securities. That would affect not only US taxpayers but also financial conditions worldwide, given the central role of the Treasury market in pricing and collateral.

Moreover, persistent large deficits in the world’s largest economy can crowd out private investment over time. In a context where advanced economies need to invest heavily in climate mitigation, adaptation and digital infrastructure, competition for savings could become more intense. Higher long term interest rates would make it more expensive to finance such investments, especially in more vulnerable countries.

The IMF is likely to recommend a gradual but credible adjustment path. Abrupt fiscal tightening could be counterproductive, especially if the economy slows. However, failing to adjust at all would allow debt dynamics to worsen. The key is to design a multi year framework that stabilizes or gently reduces the debt ratio as a share of GDP while protecting growth enhancing and equity critical spending.

On the revenue side, options include broadening the tax base by reducing loopholes and exemptions, considering moderate increases in rates for higher income groups, reforming corporate taxation to reduce erosion and profit shifting and exploring environmental taxes that also support climate goals. On the spending side, priorities include improving the efficiency of health care spending, revisiting subsidy structures and ensuring that new initiatives are backed by sustainable financing.

Entitlement reform is politically sensitive but unavoidable in the long term. Programs such as Social Security and Medicare are central to the social safety net, and any changes must protect vulnerable beneficiaries. At the same time, demographic trends mean that current benefit and contribution structures may not be sustainable indefinitely. Gradual adjustments to retirement ages, contribution rates and benefit formulas, phased in over many years, can help preserve these programs’ viability.

The IMF will also emphasize the importance of predictable and orderly budget processes. Episodes of brinkmanship over the debt ceiling and temporary government shutdowns impose unnecessary costs and can undermine confidence. Strengthening budget rules, reducing reliance on last minute continuing resolutions and improving medium term fiscal planning would support credibility.

For the rest of the world, clarity about US fiscal plans matters because it shapes expectations for interest rates, exchange rates and capital flows. Emerging and developing economies with dollar denominated debt are especially sensitive to changes in US yields. Higher US rates can tighten financial conditions, trigger capital outflows and complicate domestic policy choices.

At the same time, some countries benefit from US fiscal expansion in the short term, through higher demand for their exports and stronger global growth. The challenge is balancing these short term gains against long term risks. The IMF’s role is to highlight both sides and advocate for a path that supports sustainable global growth.

Domestic politics will ultimately determine what is feasible. Fiscal consolidation is rarely popular, especially when it involves tax increases or perceived cuts. However, history suggests that countries that act early and design fair, transparent adjustment packages tend to achieve better outcomes than those that wait until markets force drastic measures.

In sum, the upcoming IMF report on US economic policy is a reminder that even countries with privileged positions in the global system must respect basic fiscal arithmetic. High and rising debt is not an immediate crisis for the United States, but it is a slow moving risk that deserves serious attention, both at home and abroad.