The International Monetary Fund (IMF) has issued a stark warning to the U.S.: reduce American Deficit spending. According to the IMF’s first Deputy Managing Director, Gita Gopinath, economies like the U.S. need to prioritize “fiscal consolidation” and begin to consider how to bring debt levels back to pre-pandemic levels.
“For the US, we see ample ground for them to reduce the size of their fiscal deficits, also given the strength of the US economy,” Gopinath said. “The temptation to finance all spending through borrowing really is something that countries should avoid.”
Gopinath isn’t the only one concerned about ballooning debt levels. Indeed, economists and investors alike have long warned that excess deficit spending may end up causing long-term damage to the U.S. economy.
Especially since the Covid-19 pandemic, which forced governments like the U.S. to offer sweeping stimulus payments as a means of avoiding economic collapse, the annual deficit has hovered at historically high levels.
The Congressional Budget Office (CBO) projects debt to GDP to reach its highest level ever in 2029, with deficits of between 5.2% and 6.3% over the next decade, assuming Congress doesn’t stray from its current spending plans.
IMF Rings Alarm Bell Over American Deficit Spending
Per the IMF’s Fiscal Monitor, released in April, the U.S. is expected to achieve a fiscal deficit of 7.1% in 2025, more than three times higher the 2% average of other advanced economic countries.
According to Gopinath, pension systems and medical spending are areas prime for reform as aging populations force the government to spend heavily. This is in addition to raising taxes on wealthy Americans, especially via more efficient capital gains and inheritance taxes.
Gopinath also touched on the potentially detrimental effects generative artificial intelligence (AI) poses to the economy. Indeed, the IMF projects AI could threaten 30% of jobs in economies like the U.S. As a result, Gopinath advises countries to reconsider how to best help workers replaced by technology, including the use of wage insurance to help workers forced into lower-paying jobs.
“We do think that the generosity of unemployment insurance can be higher in some countries,” Gopinath said.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
