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IMF Says US, China Debt Pose Risks for Global Public Finances

IMF Says US, China Debt Pose Risks for Global Public Finances

The world’s two great economic rivals, China and the US, will drive much of the increase in global public debt over the next five years, with US spending creating trouble for many other countries by keeping interest rates high, officials at the International Monetary Fund said in a report.

“In both economies, public debt is projected under current policies to nearly double by 2053,” the IMF said in its Fiscal Monitor, an overview of global public finance developments. “How these two economies manage their fiscal policies could therefore have profound effects on the global economy and pose significant risks for baseline fiscal projections in other economies.”

Higher interest rates in the US make life difficult for many countries by strengthening the value of the US dollar against other currencies, making dollar-priced commodities more expensive and increasing debt burdens for countries that have borrowed in the US currency.

“High and uncertain interest rates in the US affect the cost of funding elsewhere in the world,” Vitor Gaspar, director of fiscal affairs at the IMF, said in an interview. “The impact is quite significant.”

As for China, the fund warned that a larger-than-expected slowdown in China — “potentially exacerbated by unintended fiscal tightening given significant fiscal imbalances in local governments” — can create risks for the rest of the world through lower levels of international trade, external financing and investments.

The report projected overall primary deficits would decline to 4.9% of global GDP from 5.5% in 2023, but with substantial risks threatening public finances in many countries.

The fund noted that voters this year will go to the polls in 88 economies representing more than half of the world’s population and GDP, in what has been termed the “great election year.”

“Support for increased government spending has grown across the political spectrum over the past several decades, making this year especially challenging,” the report said. “Fiscal policy tends to be looser, and slippages larger, during election years.”

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