The International Monetary Fund (IMF) is happy to welcome what it calls a “sobering” decrease in the U.S. federal deficit. By 2025, it anticipates the shortfall to decrease to 6.5% of gross domestic product (GDP), well below the 7.3% projected for 2024. The IMF’s recent Fiscal Monitor report shines a spotlight on a key element of closing the huge U.S. spending-revenues gap. This cut is heavily contingent on an increase in tariff revenues.
This report analyzes fiscal conditions across 191 nations and indicates that the U.S. could see its deficit further decline to about 5.6% of GDP in the medium term. The IMF’s outlook is rosy due to the revenue growth, projected at 0.7%, expected to come in. This increase is solely attributable to tariffs recently announced and elevated tariff rates.
Over the past month, yields on the benchmark 10-year Treasury note have skyrocketed, approaching 4.40%. That rise in yields is an unalloyed concern for the U.S. government. In a separate analysis, the IMF cautions that increased levels of public debt may lead to increases in long-term interest rates. In their scenarios, they point out that if U.S. public debt increases by 10 percentage points of GDP between 2024-2029 that could increase the 5-year forward to 10-year rate by 60 basis points. This increase in debt will severely affect interest rates.
Even with these estimates, there is still a great deal of uncertainty about any future fiscal action. The IMF cautioned, “These projections are highly uncertain and do not account for measures under discussion in Congress, under budget reconciliation.” The IMF highlighted that “the magnitude of the tariff revenue increase is highly uncertain,” indicating potential volatility in revenue expectations.
The implications of these developments are multifaceted. Like a declining deficit, that’s generally considered a positive sign of fiscal health. Higher yields on Treasury notes and a weakening U.S. dollar make the financial picture less rosy. Higher interest rates would raise the cost of financing the national debt, posing serious dilemmas for future government budgeting and spending.
Inflation forecasts have increased, complicating fiscal planning even more. Yet at the same time, the U.S. is under extraordinary economic pressures. Policymakers will need to be nimble in their approaches to fiscal sustainability as they confront the reality of climbing interest rates and inflationary pressures.