IMF blasts US for risky deficits, debt, trade and bank rules

The International Monetary Fund said Thursday that the US is running deficits that are too big and is weighed down by too much debt, and it warned of dangers from increasingly aggressive trade policies.

While calling the world’s largest economy “robust, dynamic and adaptable,” the fund leveled unusually harsh criticism toward the US, its biggest shareholder. It also slightly downgraded its estimate for growth this year to 2.6%, down 0.1 percentage point from its April forecast. 

“The fiscal deficit is too large, creating a sustained upward trajectory for the public debt-GDP ratio,” the IMF staff said in a summary of its annual evaluation of the US economy. “The ongoing expansion of trade restrictions and insufficient progress in addressing the vulnerabilities highlighted by the 2023 bank failures both pose important downside risks.”

The IMF, the global economic watchdog and lender of last resort, has become increasingly critical of US economic policies, warning that unsustainable borrowing and competition with China are creating risks for the global economy. 

In terms of financial stability, the IMF said in its report that “concrete actions have been lacking” since vulnerabilities were exposed by a series of bank failures in 2023. It recommended the US “fully implement” the Basel III proposals, an international accord that followed the 2008 financial crisis.

US Treasury Secretary Janet Yellen, meeting with IMF Managing Director Kristalina Georgieva earlier in the day, “reiterated the importance of frank and thorough assessments of all IMF member economies through the annual surveillance process,” Treasury said in a statement. 

It added that it plans to publish all documents related to the IMF’s evaluation, known as an Article IV review, when the fund’s board approves the final report next month, including a US response. 

Debt Bloat 

The nonpartisan Congressional Budget Office this month boosted its estimate for this year’s US budget deficit by 27% to almost $1.92 trillion.

As a share of gross domestic product, the US deficit is now seen widening for the 2024 fiscal year, which runs through September. The ratio is estimated at 6.7%, compared with a February forecast of 5.3%.

By comparison, European Union nations have a guideline of keeping shortfalls at 3% or less. The US averaged 3.7% over the past half-century, according to the CBO. 

The IMF forecast that under current US policies, general government debt is expected to exceed 140% of GDP by 2032.

“There is a pressing need to reverse the ongoing increase in public debt-GDP ratio,” the IMF said Thursday. “These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.”

Georgieva, speaking in a press briefing Thursday, said “US debt is sustainable, remains sustainable.’

“Debt levels have gone up, deficit has gone up. Yes, you can carry it,” she said. “But if you can bring it down, you would have an even stronger path for the future.”

Recent data has shown the US economy remains on track for a soft landing, although signs of a slowdown are emerging. Unemployment has nudged higher, retail sales are slowing and new-home sales slumped in May. Consumer confidence eased this month on a more muted outlook for business conditions, the job market and incomes.

Georgieva added that the IMF expects inflation in the US to continue to ease, returning to the Federal Reserve’s 2% target next year. She said the Fed should keep rates unchanged at least until late this year, adding there’s potential for one cut this year and further reductions in borrowing costs next year.