03 July 2024

The International Monetary Fund aimed criticism at growing risks in the US economy.

The US was the target of pointed criticism from the International Monetary Fund last week, with the organization calling out everything from Washington's trade policy to its deficits.

The IMF slams the US with urgent warnings over its debt, deficits, and trade barriers

Filip De Mott

Jun 30, 2024, 5:15 AM PDT

US Capitol building in Washington, DC. Getty Images

The International Monetary Fund aimed criticism at growing risks in the US economy.
In a report last week, it called out high debt, banking vulnerabilities, and trade barriers.
These are important downside risks that could impact the global economy, it said.

In its annual evaluation, the IMF touted a "remarkable performance" in the world's largest economy and expects further growth to come.
However, some issues are becoming too pressing to ignore, it said.

"The fiscal deficit is too large, creating a sustained upward trajectory for the public debt-GDP ratio," the summary said. "The ongoing expansion of trade restrictions and insufficient progress in addressing the vulnerabilities highlighted by the 2023 bank failures both pose important downside risks."

Chronic deficits are leading toward a debt-to-GDP ratio of 140% by 2032, IMF said, a situation that needs to be addressed urgently. By the US' own estimates, the national debt will balloon to $56.9 trillion by 2034, a steep increase from earlier projections.
In an era of higher interest rates, alarms have started ringing over fiscal stability as Washington will need to finance its debts at elevated borrowing costs. Some of Wall Street's heaviest hitters have issued warnings of eventual fallout.
To counter this, the IMF pushed for policymakers to find efficiencies in discretionary spending and to raise indirect and income taxes — including on those earning under $400,000 a year.

What's more, partisan debt ceiling standoffs need to end, it said. The worst instance occurred 2023, when Republicans and Democrats brought the US close to default over funding disagreements.

"These create systemic risks to the U.S. and global economy that are entirely avoidable. Institutional changes should be designed to ensure that, once appropriations are approved, the corresponding space is automatically added to the debt ceiling," the report said.

But threats to financial stability don't end there. Domestically, "concrete actions have been lacking" when it comes to strengthening US banking safety, especially in light of 2023's brief crisis sparked by the failure of Silicon Valley Bank.
The US needs to pursue tougher bank supervision, and lower the pool of uninsured deposits, the IMF said.
While the fund also suggested a need for the US to implement the Basel III regulatory agreement to do this, the proposal has been widely unpopular in the industry.
The legislation would apply larger liquidity requirements on big dealers, which banks have argued as a cut back to their ability to invest.
Meanwhile, Washington's increasingly protectionist approach to trade is a risk to US and global growth, the IMF said.
The criticism comes soon after President Biden issued new tariffs on specific advanced manufacturing products from China in an effort to boost the US green energy industry.
But the practice goes further back, when former President Trump set off a trade war with Beijing. If the Republican candidate wins the White House again, he has promised to apply universal tariffs on all imports, which economists have warned would be massively inflationary.

"The U.S. should unwind obstacles to free trade and seek instead to bolster competitiveness through investments in worker training, apprenticeships, and infrastructure," the IMF wrote.