The US government's debt burden is on a collision course with Italy's, according to the latest IMF figures, highlighting a critical issue in America's public finances. This development comes as a stark reminder of the country's financial challenges. The US is set to surpass Italy's debt levels for the first time this century, with a projected rise in gross debt by over 20 percentage points, reaching an unprecedented 143.4% of GDP by the end of the decade. This marks a significant increase from pre-pandemic records. The IMF predicts that the US budget deficit will remain persistently high, hovering above 7% of GDP annually until 2030, the highest among rich nations. This contrasts with Italy and Greece, which have made strides in reducing their debt burdens. Italy's public finances were once fragile, but they are now on a downward trajectory, thanks to stringent budget deficit control. However, the US debt-to-GDP ratio is expected to continue rising in 2030, and the Congressional Budget Office forecasts a decades-long increase. Mahmood Pradhan, an expert at the Amundi Investment Institute, emphasizes the symbolic nature of this moment, attributing the rising debt to perpetual deficits. Despite the US's global reserve currency status, which provides borrowing capacity, the country's political landscape poses challenges. James Knightley, a US economist, notes that the conversation around US finances has shifted due to such metrics. The Biden administration's federal deficit expansion, despite low unemployment, has raised concerns. Joe Lavorgna, an economic advisor, acknowledges the Trump administration's progress in cutting spending and raising revenues through tariffs. However, the US still lags behind Italy in terms of net government debt, which measures debt after accounting for financial assets. Joe Gagnon, from the Peterson Institute, suggests that the net measure provides a more accurate view of the US debt burden, which is also rising. In contrast, Italy's net debt burden is expected to decline from 2028 onwards, supported by EU funds and a robust labor market. Italy's Prime Minister, Giorgia Meloni, has garnered praise for her government's fiscal discipline, with a projected primary surplus of 0.9% of GDP this year. This progress allows Italy to exit the EU's excess deficit proceedings a year earlier than anticipated. Filippo Taddei, a senior European economist, highlights the cautious fiscal policy approach. DBRS Morningstar's recent upgrade of Italy's sovereign rating reflects its efforts to strengthen public finances. However, the US political gridlock, with Democrats resisting spending cuts and Republicans opposing tax increases, presents a significant hurdle to deficit reduction, according to Joe Gagnon. Maury Obstfeld, a former IMF chief economist, questions the sustainability of US fiscal forecasts, suggesting they rely on optimistic assumptions about productivity, tariffs, demographics, and interest rates.
