Budget deficits hinder many economies

Recently, many large economies have faced huge budget deficits. Budget imbalance not only negatively impacts the fight against inflation and retrains the growth momentum of the countries, but also brings many risks to the world economy.

Despite the positive recovery prospects of the US economy, the country's long-term financial stability remains a concern for policymakers. Statistics released by the US Department of Finance show that the US budget deficit exceeded 1,000 billion USD in the first half of fiscal 2024 (from October 2023 to March 2024), an increase of 4% compared to last year.

The International Monetary Fund (IMF) warned that the budget deficit in the US can reach 7.1% of Gross Domestic Product (GDP) in 2025, much higher than the average of about 2% of other developed economies. Although affirming that the US continues to play a leading role in global growth, the IMF expressed concern about the public finances of the world's leading economy.

According to analysts, the US Government's spending burden has increased mainly due to increased borrowing costs as the US Federal Reserve (FED) seeks to curb inflation.

Besides the US, many economies were also warned due to budget deficits. In the European Union (EU), Italy has the highest deficit, up to 7.4% of GDP in 2023.

According to a report by the European Statistics Agency (Eurostat), Rome's deficit far exceeds the average of about 3.5% of EU member states. The situation in France is not more optimistic when the budget deficit reaches 5.5% of GDP in 2023, significantly higher than the target of 4.9% set by the government. Minister of the Economy and Finance Bruno Le Maire stated that the weak economic growth leading to a decrease in tax revenue is the main reason for the increased budget burden in Paris.

IMF General Director Kristalina Georgieva said strong financial measures to respond to and recover from the COVID-19 pandemic have caused budget deficits in some EU countries to increase. The EU's Stability and Growth Pact sets regulations on limiting annual budget deficits to no more than 3% of GDP and public debt to less than 60% of GDP. This regulation allows the EU to monitor member countries' spending to avoid the risk of a public debt crisis.

However, after the COVID-19 pandemic broke out, the EU temporarily suspended regulations in 2022 on budget deficit limits in the treaty to create conditions for governments to fight the epidemic and support businesses, as well as promote economic recovery. Many experts affirmed that this is one of the reasons why the deficits in many EU countries have continued to "bulge".

Analysts said that the growing budget burden is a major threat to the stability of the US and European countries. A rising budget deficit is one of the top risks as it increases public debt and creates pressure to increase tax revenue, thereby affecting the production scale and profits of businesses and reducing economic growth rates in the medium and long term.

IMF chief economist Pierre-Olivier Gourinchas said the US public finance situation is a significant obstacle to the FED's efforts to bring inflation back to the target of 2% of GDP. Worryingly, the IMF warned that large-scale budget deficits in the US not only increase inflation but can also pose risks to the global economy. The IMF recommends that the countries quickly make decisions to handle the problem of budget revenue-expenditure imbalance. Tightening spending is a measure that the EU recommends to many member countries. EU Commissioner for Economic Affairs Paolo Gentiloni stressed that Blue Flag Alliance member countries need to quickly implement the necessary solutions to ensure the budget deficit limit set by the bloc.

Italian Economy Minister Giancarlo Giorgetti said this month that the European Commission (EC) plans to activate the process of handling deficit violations of all countries with budget deficits exceeding the EU's ceiling of 3%. According to Eurostat data, dozens of member countries currently have budget deficits exceeding the 3% ceiling.

NDO