Illustration: Chen Xia/GT
The accelerating expansion of the US budget deficit not only puts the US government debt in an increasingly unsustainable predicament, but also casts a large shadow on the world economy, especially the economies of emerging countries, under the hegemony of the dollar.
The U.S. government posted a $711 billion deficit in the first three months of fiscal year 2025, the U.S. Treasury Department said Tuesday. According to media reports, this was the highest ever for the first quarter of any financial year. According to Reuters, the deficit in the October-December period was $201 billion, or 39%, higher than the $510 billion deficit in the same period last year.
This large increase not only shows that the size of the U.S. budget deficit continues to increase, but also reveals that its growth rate is accelerating. According to the Congressional Budget Office, the U.S. federal budget deficit for fiscal year 2024 will reach $1.8 trillion, an increase of $139 billion from the previous year. This trend is undoubtedly alarming and suggests that the U.S. government’s debt problems are headed toward an increasingly unsustainable trajectory.
Further expansion of the budget deficit could also exacerbate concerns about the seriousness of the US debt problem. The U.S. national debt has surpassed $36 trillion for the first time in history, according to data released by the Treasury Department in November. Whether viewed through the lens of the U.S. government’s revenue and spending situation or the bipartisan debate on fiscal tightening, the difficulty of reducing the debt burden is increasing, with no immediate solutions in sight.
However, it is strange that there is little discussion about whether a crisis will occur, even though the US budget deficit and debt problems are becoming increasingly serious. This is partly due to the dollar’s special status as the world’s major reserve currency and the primary means of payment for international trade. This allows the United States to transfer risks to the world through changes in monetary policy.
On the other hand, dollar hegemony is also exacerbating the chain reaction of US domestic economic problems and the negative impact on the global economy.
The United States’ fiscal problems pose a serious potential threat, especially to developing countries. In the short term, an increase in the U.S. budget deficit means the U.S. government needs more money to bridge the gap between spending and revenue. This often leads to increased issuance of government bonds, which can increase yields on U.S. Treasuries and, in turn, increase the cost of borrowing in the market. For emerging market and developing countries, this increase in borrowing costs will undoubtedly undermine financial stability.
In the longer term, the United States will be more likely to adopt aggressive measures to ease fiscal pressures. For example, increasing fiscal revenue through customs duties. However, such actions not only disrupt global supply chains, but also have a serious negative impact on developing countries’ economies.
The United States can exert some fiscal pressure on the world, whether by issuing more debt or imposing tariffs. Throughout history, developing countries have always been the hardest hit by financial crises that originated in the United States.
In the face of this situation, developing countries need to remain vigilant and prepare for the worst-case scenario. In addition to strengthening financial resilience, there is a need to reduce exposure to dollar-denominated assets and promote diversified economic development.
Developing countries also need to strengthen their financial regulation and risk prevention capabilities. Establishing a sound financial regulatory system and improving the risk resilience capacity of financial institutions are essential measures to address potential financial disruptions and crises.
First, developing and emerging market countries can advocate for reform of the international monetary system to give them a greater voice in international financial decision-making.
Second, China can expand the use of the renminbi in cross-border trade and investment, increase international recognition and usage, and enhance financial stability.
Third, China and other developing countries should expand the use of special drawing rights (SDRs), create a more diverse and stable international monetary reserve system, and alleviate the impact of dollar hegemony on the world economy. can proactively make suggestions.
