Alex Lo
SCMP Columnist
My Take
by Alex Lo
My Take
by Alex Lo

US, heal thy fiscal health first for the sake of the global economy

  • American lawmakers cannot or will not deal with their nation’s own multitrillion-dollar debt problem, so they complain about China’s

The International Monetary Fund has issued a statement urging the United States to “urgently” address its mounting fiscal burden and called on its leaders to raise taxes to plug the gap.

This came after the non-partisan Congressional Budget Office (CBO) projected that US debt is on course to hit US$56 trillion in a decade.

The country is currently more than US$34 trillion in debt, which is equal to 99 per cent of its entire gross domestic product.

So, what did some US lawmakers do? They convened a meeting warning against China’s multitrillion-dollar local government debt.

Apparently the House Oversight committee wanted to call attention to China’s property market downturn and the risk it and opaque financing vehicles carried by local governments posed to the Chinese and world economies.

Never mind Beijing deliberately bursting the property bubble and crushing the most heavily indebted private developers, rather than kicking the can down the road.

There are many threats to the global economy. US fiscal health is among the biggest. But in the current run-up to the presidential election, Joe Biden wants to cut taxes for the middle class while Donald Trump wants the same for the rich, just like he did when he was last president.

The IMF and the CBO are largely in agreement. The IMF projects the debt-to-GDP ratio of the world’s biggest economy to hit 140 per cent by 2032, on the back of successive projected fiscal deficits in the coming years.

“Such high deficits and debt create a growing risk to the US and global economy,” the fund said. “These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.”

The fund said the US needed to “carefully consider” a range of tax rises, including for those earning under US$400,000 annually. But if there is one thing Biden and Trump agree on, there will be no such tax increase.

The CBO, meanwhile, predicts a debt ratio of 122 per cent to US$56 trillion by 2034. Annual interest payments will rise to US$1.7 trillion in 2034 from US$892 billion this year, a figure that is roughly equivalent to last year’s nominal military budget.

At that point, the US will be spending about as much on interest payments as it does on Medicare, the US federal health insurance programme.

Both Republicans and Democrats have accused each other of worsening the country’s deficit outlook; they are both right.

Of course, most of them have no interest in dealing with the deficit so long as they can get through their terms in office.

What better way than to distract people than fretting about China’s debt as a “time bomb” such as at the latest hearing held by the committee.

There are actually all sorts of hidden time bombs within the US economy and its banking system.

The US Federal Reserve, for example, has repeatedly warned against hidden leverage with hedge funds and their heavy use of derivatives.

There is no doubt that local Chinese governments hold massive debts, especially after the property bubble – a major source of funding for most of them – was deliberately punctured by Beijing. They have been forced to cough up details about hidden debts, with varying success.

This is not to deny the risk they pose to the Chinese economy. But there is a big difference between the Chinese and American economies.

The US is a debtor nation, while China is a surplus country, with more than US$3 trillion in foreign exchange reserves that will serve as a shock absorber.

Its much criticised capital controls and limited yuan convertibility also mean the routes of financial contagion spreading to the global economy are much less direct than an open economy like the US, as we saw in the financial meltdown of 2007-08.

When your own car is making loud funny noises, you may want to look into that first rather than complain about your neighbour’s.