The International Monetary Fund (IMF) projects that U.S. tariffs will contribute to a slight reduction in the country’s fiscal deficit in 2025, despite a deteriorating growth and inflation outlook driven by an escalating trade war.
A report from the IMF’s Fiscal Monitor, released on Wednesday, estimates that the overall federal deficit will decrease to 6.5% of gross domestic product (GDP) this year, down from 7.3% in 2024.
This anticipated reduction in the deficit is described as “contingent on higher tariff revenues,” according to the report.
The projections are informed by the IMF’s forecasts made as of April 4, incorporating tariff announcements such as the reciprocal tariffs introduced on April 2. However, later measures, including a 90-day moratorium on raising rates and exemptions for certain technology products, were not factored into the calculations.
Looking further ahead, the IMF estimates that the deficit could narrow to 5.6% of GDP in the medium term, bolstered by a projected 0.7% increase in revenues.
Uncertain revenue
It is important to note that the report emphasizes the unpredictable nature of tariff revenue increases.
One of the key uncertainties in the reduced deficit forecast is the potential impact of tariffs on U.S. imports. This impact heavily relies on consumer responses to rising prices, which vary significantly depending on the product, the report highlights.
Moreover, the report mentions the uncertainty surrounding the tariff schedule itself, which is crucial to the overall revenue estimate.
The IMF also identified another risk to its projections: the possibility that tariffs could trigger a broader slowdown in economic activity, potentially leading to declines in other tax revenues, such as income tax, which could negate the benefits of increased tariff revenues.
“These projections carry a high degree of uncertainty and do not factor in the potential measures being considered in Congress amid budget reconciliation discussions,” the fund stated.
In recent weeks, yields on the benchmark 10-year Treasury note have surged, recently trading around 4.40%. This rise follows the announcement of higher tariffs, increased inflation forecasts, and a declining dollar.
The IMF suggests that if the total size of U.S. government debt continues to rise, it could lead to higher long-term interest rates and increased financing costs for the debt. Specifically, an increase of 10 percentage points in GDP attributable to U.S. public debt between 2024 and 2029 could result in a 60-basis-point increase in the 5-year forward to 10-year rate, according to IMF staff estimates. One basis point equates to 1/100th of a percent, or 0.01.
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