If the financial positions of the world’s two largest economies are becoming unsustainable, should the rest of us be concerned?

As the public debt and budget deficits of the US and China, already outsized relative to most advanced economies, continue to mount, the risks of spillovers to the rest of the global economy are rising in tandem.

The International Monetary Fund’s latest fiscal monitor predicts the US budget deficit, expected to be 6.5 per cent of GDP this year, will rise to 7.1 per cent of GDP next year. US government debt is projected to increase from 123.3 per cent of GDP this year to 126.6 per cent in 2025, and hit 133.9 per cent by 2029.

Debts and deficits are mounting in Xi Jinping’s China and Joe Biden’s America.Credit: AP

China’s deficit of 7.4 per cent this year is projected to continue to edge up and reach 7.9 per cent in 2029, while its general government debt is expected to surge from 88.6 per cent of GDP this year to 110.1 per cent in 2029.

At 7.1 per cent, the US deficit would compare with the 2 per cent average deficits other advanced economies are expected to incur next year, while the 2025 projection for US government debt is more than 25 percentage points higher, relative to GDP, than other advanced economies.

Similarly, while China’s projected deficits and debt aren’t as daunting as those projected for the US, its deficit next year would be more than twice that of other emerging economies and, on the IMF’s trajectory, its debt-to-GDP ratio in 2029 would be nearly twice that of other emerging economies.

There are enough trade and conflict-related threats to global stability without the growing question marks over the stability of the world’s two largest economic and military giants.

These things aren’t static. It’s open to the US and China to change those potential outcomes and China, in particular, has both a lot more headroom in terms of its debt levels and the flexibility of an authoritarian state to respond to fiscal challenges.

In the US, while there’s been a lot of talk on the Republican side about the need to stabilise the US government’s fiscal position, primarily by slashing spending rather than raising taxes, there’s been no material action.