IMF predicts lower U.S. deficit in 2025 due to tariff revenue

In April 2025, the International Monetary Fund released its Fiscal Monitor report, indicating a modest reduction in the U.S. fiscal deficit. The report highlights that the deficit is expected to fall to 6.5% of gross domestic product (GDP) in 2025, down from 7.3% in 2024. This decrease is largely attributed to increasing revenue from U.S. tariffs amid a challenging economic backdrop influenced by an intensifying trade war. Despite this reduction, the IMF noted significant uncertainty surrounding the actual revenue collected from tariffs, as this will depend on consumer behavior in response to price increases. The report cited that while tariff revenues are projected to rise, the overall economic context remains precarious. Factors such as a potential slowdown in economic activity could negatively impact other segments of tax revenue, like income tax. Furthermore, the uncertainty of the tariff schedule itself poses a risk to the predicted revenue, as fluctuations in trade policies can significantly alter the expectations surrounding tariff collections. In addition, recent trends indicate that U.S. government debt levels are rising, which could lead to higher long-term interest rates. The IMF warned that a projected increase of 10 percentage points of GDP in U.S. debt between 2024 and 2029 may precipitate a 60-basis-point increase in the benchmark 10-year Treasury rates. This scenario reflects deepening concerns regarding the sustainability of U.S. fiscal policy amidst ongoing trade tensions and rising inflation forecasts. The Treasury yields have seen substantial increases with current rates around 4.40%. Investors are reacting to the combination of tariff announcements, inflation projections, and a weakening U.S. dollar. Overall, the future trajectory of the fiscal deficit is contingent upon effective tariff revenue collection, as well as the broader implications of the U.S. trade policies on economic performance and consumer spending.