GT Voice: Record US fiscal deficit calls for vigilance from developing world

Illustration: Chen Xia/GT

The accelerated expansion of the US fiscal deficit not only plunges US government debt into an increasingly unsustainable predicament, but also casts a heavy shadow over the global economy, particularly developing economies, under the dollar’s hegemony.

The US government posted a $711 billion deficit for the first three months of the 2025 fiscal year, the US Treasury Department said on Tuesday. It marked a record high for the first quarter of any fiscal year, according to media reports. The October-December deficit was $201 billion, or 39 percent higher, than the $510 billion deficit in the same period a year earlier, Reuters reported.

This significant increase not only indicates that the scale of the US fiscal deficit is continuously on the rise, but also reveals that its growth rate is accelerating. In fiscal year 2024, the US federal budget deficit reached $1.8 trillion, an increase of $139 billion compared with the previous fiscal year, according to the Congressional Budget Office. The trend is undoubtedly concerning, suggesting that the US government’s debt problem is heading toward an increasingly unsustainable trajectory. 

The further expansion of the deficit may also exacerbate concerns over the severity of the US debt issue. Data from the Treasury Department in November showed that the US national debt had surpassed $36 trillion for the first time in history. Whether viewed through the lens of the US government’s revenue and expenditure situation or the bipartisan debates regarding fiscal tightening, the difficulties of reducing the debt burden are growing, with no immediate solution in sight.

However, despite the increasingly severe deficit and debt issues in the US, it is also strange that there hasn’t been much discussion about whether there will be a crisis. This is partly due to the special status of the dollar as the world’s primary reserve currency and the main settlement tool for international trade. This allows the US to shift risk through changes of monetary policy to the world.

In the meantime, dollar hegemony has also exacerbated the chain reactions and negative impacts of domestic economic problems in the US on the global economy. 

For developing economies in particular, US fiscal problems pose a significant potential threat. In the short term, the increase in the US fiscal deficit means that the US government needs more funds to cover the gap between expenditures and revenues. This often leads to an increase in the issuance of government bonds, which could lead to higher yields on US Treasury bonds and in turn raise borrowing costs in the market. For emerging markets and developing economies, this rise in borrowing costs undoubtedly erodes their financial stability.

In the long term, the US will be more prone to adopting aggressive measures to alleviate fiscal pressure. For example, increasing fiscal revenue through tariffs. However, such practices not only disrupt global supply chains but also have serious negative impacts on developing economies. 

Whether through increasing government bond issuance or imposing tariffs, the US can to some extent shift its fiscal pressure onto the world. Throughout history, developing countries have always suffered the most from financial crises that started in the US.

In the face of such a situation, developing economies need to remain vigilant and make preparations for the worst-case scenarios. Besides strengthening their financial resilience, they need to reduce their exposure to dollar-denominated assets and promote diversified economic development. 

Developing economies also need to strengthen their financial regulation and risk prevention capabilities. Establishing a sound financial regulatory system and improving the risk resistance capacity of financial institutions are essential steps to cope with potential financial turmoil and crises.

First, developing countries and emerging market countries can advocate for reforming the international monetary system to raise their say in international financial decision-making. 

Second, China can expand the use of the yuan in cross-border trade and investment, increasing its international recognition and usage, enhancing their financial stability. 

Third, China and other developing countries can actively propose to broaden the scope of special drawing rights (SDR) usage, create a more diversified and stable international monetary reserve system, and mitigate the impact of dollar hegemony on the global economy.