IMF Forecast: US Debt to Surpass Italy and Greece This Century

Article Summary

• IMF predicts US debt surpassing Italy and Greece.
• Growing US fiscal deficit worries economists.
• Comparison of the financial situation of the US, Italy, and Greece.
• Impact of government policies on public debt.

According to the International Monetary Fund (IMF), the US government's debt burden is projected to exceed that of Italy and Greece this century, painting a grim picture of the country's public finances. Estimates suggest that the US general government gross debt will rise by more than 20 percentage points of gross domestic product (GDP) to reach 143.4% by the end of the current decade, surpassing previous records set in the wake of the COVID-19 pandemic.

Concurrently, the IMF anticipates that the US budget deficit will remain steady at levels exceeding 7% of GDP annually until 2030. This rate is considered the highest among all wealthy nations tracked by the Fund during this timeframe.

Italy and Greece have long been subjects of concern for economists due to their fragile fiscal situations. They were at the heart of the Eurozone sovereign debt crisis between 2010 and 2012, with Greece requiring a bailout and debt restructuring under the supervision of the IMF and the European Union.

However, as a result of efforts by these European countries to control budget deficits, their government debt burden is expected to decline over the remainder of this decade. In contrast, IMF data indicates that the US debt-to-GDP ratio will continue to rise until 2030, and the Congressional Budget Office (CBO) projects this trend to continue for decades to come.

Impact of Rising Debt on the US Economy

Mahmood Pradhan, Global Head of Macroeconomics at Allianz Investment Institute, says: "It's a significant moment, as CBO projections indicate that US debt will continue to rise, reflecting the impacts of persistent deficits." He adds: "However, Italy's growth prospects are weaker than the US, so this should not be interpreted as Italy exiting the problem."

James Knightley, US economist at ING Group, believes the United States has a borrowing capacity that exceeds European countries due to its possession of the world's reserve currency. However, he points out that "While many US politicians and investors view Europe and its struggling economies with a degree of disdain, the emergence of indicators like these changes the course of the discussion."

Despite low unemployment rates, the US federal deficit has expanded rapidly under the Biden administration. IMF projections indicate that officials believe the Trump administration took only limited steps to address this problem.

Joe Lavorgna, economic advisor to US Treasury Secretary Janet Yellen, says that the Trump administration made progress in reducing spending and increasing revenue through tariffs on imported goods. He added: "The fact that is being ignored is that most of the improvement in the fiscal deficit this year started since April."

IMF data shows that the US general government gross debt has been lower than that of Italy and Greece at least since the beginning of this century. This indicator is a broad measure of debt level, covering the debts of central and local governments.

Another measure, net government debt after excluding financial assets, indicates that the level of debt in the United States will remain about 10 percentage points lower than Italy by the end of the current decade. Joe Gagnon of the Peterson Institute believes that the net debt index better reflects the US debt burden, as it closely reflects the portion of debt that investors need to hold. He adds: "But this net debt index is also on the rise."

In contrast, the IMF expects Italy's net debt burden to begin to decline from 2028. The Fund did not provide projections for Greece's net debt.

Challenges for Italy and the Future of US Debt

Italy has long faced difficulties in controlling its debt size due to weak GDP growth, and the IMF expects the country's economic growth rate to be 0.5% this year and 0.8% in 2026.

However, the government of Italian Prime Minister Giorgia Meloni has been praised by foreign investors for its efforts to reduce the budget deficit. Italy is expected to achieve a primary surplus of 0.9% of GDP this year, which is higher than the initial forecast of 0.5%.

Rome expects the fiscal deficit this year to be 3% of GDP, compared to 8.1% when Meloni took office in 2022, which will allow Italy to exit the European Union's excessive deficit procedure one year ahead of schedule.

Filippo Taddei, Senior European Economist at Goldman Sachs, says: "[Italy's] fiscal policy will continue to take a cautious approach."

The credit rating agency DBRS Morningstar raised Italy's sovereign credit rating from "Low A" to "High BBB" this month. Analysts said Italy's ability to secure more than €200 billion from the EU's pandemic recovery plan supports its efforts to strengthen public finances.

Carlo Capuano, Deputy Head of the Sovereign Rating Team at Scope Ratings, adds that Italy has also benefited from the recovery of the labor market and increased tax revenues, partly due to the increasing prevalence of digital payments.

In contrast, Gagnon believes that the political situation in the United States makes it difficult to predict how the country's enormous deficit can be reduced, regardless of who is in power.

Gagnon says: "Democrats don't want to cut spending, and Republicans don't want to raise taxes. They all want to stick to this position. I don't know when this situation will change."

国际货币基金组织前首席经济学家、现任加州大学伯克利分校教授毛里西奥·奥布斯特菲尔德得出结论，任何有关美国金融状况可持续性的预测“都必须基于对未来生产力增长、关税收入、人口结构或利率，或者以上所有因素的一厢情愿的想法”。