The International Monetary Fund (IMF) has recently published its Fiscal Monitor for October. It charts a realistic course for fiscal repair in the United States. According to the report, U.S. deficits are projected to decrease from 7.3% of GDP in 2024 to 6.5% this year, with a further decline to 5.4% by 2027. Former President Donald Trump’s massive, no-pay tax cuts and new spending would blow a hole in these rosy figures. They are on track to deepen the nation’s already grave fiscal burdens.
The IMF forecast is not rosy, projecting U.S. deficits remaining near 5.5% for the next decade. Some of Trump’s new legislative proposals would drive those numbers above 6% of GDP well into the 2030s. The U.S. debt has hit a historic $36.1 trillion dollars. Few shapes of fiscal policy have brought on as much alarm amongst fiscal policymakers and analysts as this surprising figure.
Trump’s counterpropos—his very own ambitious “Big, Beautiful Bill”—are lofty in their commitments. It exacerbates troubling concerns about the fiscal priorities of our national budget. In response, the proposed legislation is massive tax cuts. It suggests substantial reforms to entitlement programs, making for a far more substantive $2.5 trillion at-risk threat to the federal budget. Critics have pointed out that despite the bill’s swagger, it does not include enough budgetary ballast to accomplish its ambitious goals.
Sure enough, market observers have been watching closely for the bond market’s reaction to these developments. The 10-year yield crossed through important psychological technical resistance levels in short order, illustrating accelerating fear about U.S. deficits and debt. Fears of a fiscal free-for-all in Washington are mounting. As a result, bond vigilantes are beginning to awaken, expressing concerns about the current state of fiscal policy and its long-term consequences on economic stability.
Yields on other Treasury securities are increasing even more sharply. Investors are rightly concerned both about supply and the impression that Washington has given up on fiscal restraint. Investors and analysts are understandably anxious over the Treasury market’s capacity to absorb an explosion of new supply. Retirement lobbyists oppose the provision for fear that it will result in increased risk premiums.
The IMF’s projections had to assume, as projected by current law, that U.S. deficits would slowly fall over time. If Trump’s proposals gain traction, they could disrupt this forecast, leading to increased deficits that may hinder fiscal recovery efforts. The uncertainty surrounding these proposals has thrown Congress into chaos, as lawmakers grapple with the implications of potential changes to tax and spending policies.