The International Monetary Fund predicts that U.S. tariffs will slightly reduce the fiscal deficit in 2025, despite worsening growth and inflation outlooks due to an escalating trade conflict.
According to the Fiscal Monitor report from the 191-member organization released on Wednesday, the overall U.S. federal deficit is expected to decrease to 6.5% of the gross domestic product this year, down from 7.3% in 2024.
The report indicates that the narrower deficit is "dependent on increased tariff revenues."
The level was determined based on the IMF’s "reference point" forecasts, which consider tariff announcements up to April 4. This includes the U.S. "reciprocal" tariffs announced on April 2 but excludes later implementations such as the 90-day pause on higher rates and exemptions for smartphones, semiconductors, and other tech goods.
Given these conditions, the deficit is projected to decline to 5.6% of GDP in the medium term, as revenues are expected to rise by 0.7%, according to the IMF.
Uncertain revenue
It is important to note that the report states, "the extent of the tariff revenue increase is highly uncertain."
A key factor affecting the reduced deficit projection is the impact of tariffs on U.S. imports, which largely depends on consumer responses to higher prices. This impact varies significantly across different products, as noted in the report.
Additionally, "the tariff schedule itself is uncertain and plays a crucial role," the report continues.
The IMF also recognized another risk to its forecast: whether tariffs might lead to a broader economic slowdown that could decrease other tax revenue sources — like income tax — potentially offsetting the increased tariff revenues.
"These projections are highly uncertain and do not consider measures currently being discussed in Congress, under budget reconciliation negotiations," the fund stated.
Yields on the benchmark 10-year Treasury note have surged in recent weeks, last trading near 4.40%, following the announcement of higher tariffs, increased inflation forecasts, and a decline in the dollar.
If the overall U.S. government debt continues to rise significantly, the IMF believes it could lead to an increase in longer-term interest rates and the cost of financing the debt.
"Specifically, an increase of 10 percentage points of GDP in U.S. public debt between 2024 and 2029 could cause a 60-basis-point rise in the 5-year forward to 10-year rate," the IMF staff wrote. One basis point is equivalent to 1/100th of a percent, or 0.01.
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