International Monetary Fund flags escalated dangers to broad fiscal health due to ongoing US trade dispute
Unprecedented Market Volatility: Decoding the U.S. and China's Public Debt Strategies
Economic uncertainty has sent waves through global markets, with investors scrambling to navigate the choppy waters. According to the International Monetary Fund's (IMF) latest global economic forecast, prospects have taken a significant hit, and risks are tilted towards a downward spiral.
At the helm of this financial rollercoaster is the on-again, off-again introduction of tariffs by the U.S. president, causing markets to surge in volatility and worrying investors. Vitor Gaspar, the head of the IMF's Fiscal Affairs department, warned of the 'heightened uncertainty' surrounding tariffs and economic policy, which has added layers of complexity to the global debt outlook.
In its recent report, the IMF expects global general government debt to reach over 95 percent of economic output this year and approach 100 percent by 2030. More than a third of the world's economies, accounting for 75 percent of global GDP, are expected to face an increase in indebtedness this year. Among these, top players like the United States, China, Germany, Britain, and France will grapple with their debt burdens, though each will face very different realities in dealing with this challenge.
The US: Steady as She Goes
The United States has a unique advantage in managing its debt due to its continental stature. With an abundance of options on both the revenue and spending sides, the US government can choose to control its deficit and stabilize the level of public debt, should it decide to do so. However, the choices to be made will depend on the complexities of the US political system.
Unlike China, the US has maintained a relatively stable debt-to-GDP ratio since the COVID-19 period, despite high total debt levels. The government's borrowing continues to serve as a buffer to economic shocks, supporting the household sector's deleveraging process.
China: A Shift in Debt Burden
China, on the other hand, is grappling with a painful deleveraging phase following the burst of its 2022 real estate bubble. To stabilize the economy, China is promoting manufacturing and technology investment, even if this leads to some inefficient government support and excess capacity.
To ease the burden on the corporate and household sectors, China is moving to transfer debt to the government, allowing these sectors to deleverage gradually. This strategy mirrors Japan’s approach in the 1980s and the US strategy post-2007 crisis. China's government debt is expanding rapidly, with the total debt-to-GDP ratio surpassing that of the US in recent years.
The IMF has noted that China's local government debt surged significantly, with augmented local government debt estimated at 93% of GDP by 2023, up about 60 percentage points from earlier years. China plans to swap 10 trillion yuan of off-budget local government debt with official debt from 2024 to 2028 to formalize and better manage local government liabilities, increasing the official debt-to-GDP ratio but reducing financing pressures on local governments.
In the short term, China's fiscal policy is expansionary, with a projected budget deficit of about 8.6% of GDP in 2025. This is driven by lower non-tax revenues and policies aimed at boosting consumption and social safety nets, supporting economic stability in uncertain times.
References:
- [1] "How China’s deleveraging plan could worryingly resemble Japan’s" - South China Morning Post
- [2] "China: Fiscal Green Book 2020-2022" - IMF
- [3] "IMF supports China's fiscal policy" - Xinhua
- [4] "China to Push Up Budget Deficit" - The Wall Street Journal
- [5] "China and the United States" - Council on Foreign Relations
- France, like other top economies such as the United States, Germany, Britain, and China, is expected to face increased indebtedness this year, complicating its debt management.
- The International Monetary Fund (IMF) has warned of heightened uncertainty surrounding economic policy, including tariffs, which has added complexity to the global debt outlook, affecting business, finance, politics, and general news.
- Unlike the United States, China is grappling with a painful deleveraging phase following the burst of its 2022 real estate bubble, with China's local government debt surging significantly and its government debt expanding rapidly.
- The United States has maintained a relatively stable debt-to-GDP ratio since the COVID-19 period, relying on its continental stature and options on both the revenue and spending sides to control its deficit and stabilize the level of public debt, subject to the complexities of its political system.
- In contrast to China's expansionary fiscal policy, the IMF expects global general government debt to reach over 95 percent of economic output this year and approach 100 percent by 2030, with more than a third of the world's economies, accounting for 75 percent of global GDP, facing an increase in indebtedness in the same period.
