The chart below shows the International Monetary Fund’s (IMF) projection of national budget deficits as a percentage of gross domestic product (GDP). Sustained deficits in most countries are the order of the day, which is concerning given the era of ultra-low interest rates has ended. With the late 2020s in sight, governments are facing the challenges of ageing populations, declining tax bases and the hangover from pandemic stimulus spending.
Aside from Australia (discussed further below), the Germans are on track for the smallest deficits (hence the green line closest to zero in the chart); the French, Italians and Japanese – known for their high overall debt burdens – are projected to make some progress closing their budget gaps.
Source: IMF, MacroBond
The US and China stand out both for their very wide deficits and how little progress is expected, with China’s budget deficit projected to exceed that of the US in 2025 and reaching 8% of GDP by 2028.
The US can traditionally run large deficits more easily than other countries due to the US dollar’s status as the international reserve currency and global demand for ultra-liquid Treasuries. Still, a “buyer’s strike” for US debt is always possible if investors fear either a downgrade in rating or further deterioration in fiscal discipline. And with the US presidential election in November, the level of uncertainty is high.
As for China, despite its recent economic challenges, it is expected to post faster GDP growth than the US (in the range of 4-5%, compared with the US growth rate of 2-3%), making China’s deficit more bearable.
Australia stands out as having a strong Budget outlook compared to peers, having reaped the benefits of record taxes on commodity exports plus the extraordinarily low rate of unemployment. The projections below will be updated when the Budget is delivered on the second Tuesday in May.
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