The U.S. and China Must Tackle Debt and Deficit Challenges, Says IMF Official
U.S. and China Face Long-Term Fiscal Issues
The United States and China need to address their medium-term debt and deficit concerns to ensure a sustainable future, according to Vitor Gaspar, the International Monetary Fund Fiscal Affairs Director. In an interview, Gaspar highlighted that sticking to their current fiscal paths will lead to difficulties for the world’s two largest economies.
Debt Levels Rising After COVID Surge
Both the U.S. and China are projected to witness a return to higher debt levels after experiencing a decline in debt-to-GDP ratios over the past two years due to the post-COVID growth surge fading. Gaspar pointed out that the primary drivers behind these escalating debt levels are large and persistent budget deficits, ranging from 6% to 7% of GDP until 2028. Furthermore, the growth prospects for both countries are currently weak.
Challenges for the United States
Gaspar emphasized that the United States faces the challenge of persistently high and growing budget deficits. Without tax and spending law changes, the Congressional Budget Office (CBO) projects that the U.S. deficits will reach pandemic-era levels by the end of the decade. Gaspar suggested that Washington needs to make difficult choices, such as implementing higher taxes on wealthy individuals and eliminating tax breaks for fossil fuel production. Additionally, raising or removing the income cap on Social Security taxes could aid in resolving the issue. Gaspar also recommended doing away with the debt ceiling and adopting stronger budgeting rules.
Growth Concerns for China
China, on the other hand, faces different challenges, with the most significant being slowing economic growth. Gaspar highlighted the need for Chinese authorities to pay attention to the growing debt at the sub-national government level and reduce the country’s reliance on real estate and infrastructure investment for growth. To overcome these challenges, China requires a new growth model that shifts focus from exports and investment to domestic demand. This transformation would necessitate the establishment of a more generous social safety net, allowing consumers to spend more and save less. Gaspar also noted that China has the advantage of policy flexibility and various options to stimulate innovation and transition to new industries, such as electric vehicles and alternative energy products.
Overall, both the United States and China must address their fiscal challenges to ensure long-term stability and growth. Making necessary changes, such as reducing budget deficits and shifting growth models, will be crucial for these global economic powerhouses.
