Trump’s tax-cutting drive likely to boost US debt, IMF warns

21 Apr 17

US president Donald Trump’s plans to cut taxes could drive the country’s debt up by more than 11% of GDP by 2022, according to the International Monetary Fund.

 

In the of its biannual Fiscal Monitor, the IMF increased its debt forecasts based on an assumption that Trump would go ahead with personal and corporate income tax cuts worth around 1% of GDP over 2018 and 2019.

Under such circumstances, the fund would expect the country’s debt to hit 108.9% of GDP in 2018 – an increase of 2.2% of GDP relative to its forecasts from April last year. By 2022, the debt-to-GDP ratio could have increased by more than 11%.

Presenting the Fiscal Monitor, Vitor Gaspar, head of the IMF’s fiscal affairs department, explained that a “large part” of this debt increase could be explained by the new tax policy.

He highlighted that the hypothetical scenario illustrates how policies that typically work to magnify the positive trajectory of an economy “can be a major factor racheting up the public debt ratios”.

Despite insistence to the contrary from Trump and his administration, a number of economists have argued that his promises to cut taxes would serve to increase the US’s budget deficit even when factoring in the potential growth such a cut could unleash.

The IMF – which doesn’t take account of Trump’s other policy pledges including an overhaul of corporate tax and substantial spending on defence and infrastructure – shares this view.

It envisages the US’s underlying deficit to reach 2.3% of GDP in 2018 – an increase of 1.1% of GDP compared to last April’s expectations.

Gaspar emphasised that measures that did not have such consequences for the deficit, and the subsequent “surprisingly large” impact on debt, would be better for growth in the long run.

The Fiscal Monitor also warned on rising deficits and debt in the world’s low-income nations, where a mixture of commodity price crashes, insecurity, extreme weather and looser spending or tax policy have dented the government accounts.

The average deficit across this group of economies increased for the third consecutive year, reaching 4.4% of GDP – above the level observed at the onset of the global financial crisis, the IMF noted.

As a result, the average debt ratio has now hit 40.4% of GDP, up 4.3 percentage points from a year ago.

The IMF is not the only organisation to warn on a worrying rise in debt in the world’s poorer countries.

As advanced economies – namely the US – move away from an era of low interest rates and cheap access to finance, it is going to be increasingly difficult for indebted poor countries to pay off their dues. This is exacerbated by a stronger dollar, with much developing country debt denominated in the US currency.

The fund also warned of the potential risks posed by explicit or implicit government guarantees on corporate debt or private finance for infrastructure, for instance.

“In low-income developing countries, the fast growth in public-private partnerships in the past 15 years has led to an accumulation of contingent liabilities... project failures due to weak growth or tighter financial conditions could lead these guarantees to be called on, increasing the public debt burden.” 

  • Emma Rumney

    Emma is a reporter at Cooking Recipes International. She also writes for in the UK.

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