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The International Monetary Fund has warned the US that its huge fiscal deficits are fuelling inflation and pose a "significant risk" to the global economy.

In its benchmark Fiscal Monitor, the IMF said it expected the US fiscal deficit to reach 7.1 per cent of gross domestic product next year, more than three times the 2 per cent average of other advanced economies. The assessment comes amid growing concern among economists and investors that 2025 will be a year of tightening fiscal policy in the United States.

Trump, the presumptive Republican presidential nominee, has reportedly pledged to make his 2017 tax cuts permanent, a move that think tanks project will cost $5 trillion in lost tax revenue over the next decade. On Tuesday, Pierre-Olivier Gourinchas, the IMF's chief economist, said the US fiscal situation was "of particular concern" and "poses short-term risks to the process of reducing inflation, as well as long-term fiscal and financial stability risks to the global economy".

High government spending in the early days of the pandemic, coupled with a sharp rise in global borrowing costs as central banks try to contain the worst bout of inflation in decades, has ballooned government debt burdens. At the end of last year, total federal debt was $26.2tn, or 97 per cent of GDP, according to the Congressional Budget Office. It is expected to reach the previous post-World War II high of 116% by 2029.

In other advanced economies, such as the eurozone, fiscal deficits are contained by 2023. However, the IMF said there had been a "very large fiscal decline" in the US, with the deficit reaching 8.8 per cent of GDP last year, more than double the 4.1 per cent in 2022. The country's fiscal deficit contributes 0.5 percentage points to core inflation, meaning interest rates will need to stay higher for longer to get inflation back to the Fed's 2 per cent target.

In addition, the Congressional Budget Office believes that net interest payments to holders of U.S. Treasury bonds will exceed $1 trillion after 2026. The IMF noted that "sudden and sharp increases" in US borrowing costs typically lead to spikes in global government bond yields and currency volatility in emerging market and developing economies.

An IMF analysis found that for every 1 percentage point rise in US interest rates, interest rates in other advanced economies rose by 90 basis points, and those in emerging markets rose by 1 percentage point. "Spillovers from global interest rates could tighten financial conditions and increase risks elsewhere," the IMF said.