While the European countries have brought their spending under control, the US president’s tax cuts and defence spending will lead to increased borrowing
By Phillip Inman
Donald Trump is on course to push US debt levels above those of Italy and Greece by the end of the decade after wide-ranging tax cuts and increased defence spending, according to International Monetary Fund (IMF) forecasts.
Illustrating the rising debt levels in Washington and efforts made by Rome and Athens to bring spending under control after the 2008 financial crash and Covid-19 pandemic, the IMF predicts the US will see its debts climb from 125% to 143% of annual income by 2030, while Italy’s will flatline at about 137%.
Greece is on track to cut the ratio of debt to gross domestic product (GDP) from 146% to 130% over the same period. According to IMF data, Athens has tackled a budget overspend that raced to 210% as a proportion of GDP in 2020.
Amid tax cuts for high earners, the US is expected to run annual budget deficits of more than 7% over the next five years, while Italy is due to cut its spending shortfall this year to 2.9%, allowing it to meet a 3% limit set by Brussels a year early, in analysis first reported in the Financial Times.
Trump increased US government spending and cut federal taxes in the “big, beautiful bill”, passed by Congress in the summer, forcing the White House to rely more heavily on borrowing to fund annual spending.
The US president reversed efforts under the previous Biden administration to limit the size of the US deficit, offering tax cuts that will benefit mostly middle and high income groups. He has also pledged to build a “golden dome” defence shield, which could cost almost $1tn.
Spending increases could push the budget deficit higher by $7tn a year by the time Trump is due to leave office in January 2029.
Both Italy and Greece have committed to maintaining primary budget surpluses, which entail cuts in spending to below the incomes from tax receipts.
Italy’s growth rate is expected to average 0.5% over the next couple of years. Its population is falling due to a declining birthrate and a level of emigration that hit 200,000 last year, but Italy has seen average household incomes recover.
Lorenzo Codogno, the head of Lorenzo Codogno Macro Advisors and a former chief economist at Italy’s treasury department, said there was pressure on Giorgia Meloni’s government to increase spending in the wake of Trump’s tariffs and his demands for bigger European defence budgets.
He said: “The economy and public finances remain vulnerable to a sudden negative shift in the global scenario.”
Mahmood Pradhan, head of global macro at the Amundi Investment Institute, told the FT: “It is a symbolic moment, and according to the Congressional Budget Office the projections are for US debt to carry on rising – that is the impact of running perpetual deficits.
“But Italy has a weaker growth outlook than the US, so this should not be read as meaning Italy is out of the woods.”
James Knightley, chief international economist at ING, said: “Many US politicians and investors look down somewhat on Europe and its slow growth and struggling economies, but when you have metrics like this, the conversation changes.”