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IMF urges US fiscal reforms as growth set to slow

By Judith Ugwumadu | 17 June 2014

The US needs to better control its health spending and overhaul its tax system so it generates more revenue, the International Monetary Fund said as it slashed the country’s growth forecast.

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In its annual statement on the US economy, the IMF cut its growth expectations for 2014 to 2.0%, from the 2.8% forecast in April. A harsh winter and a struggling housing market were cited as the chief drags on the US’s economic recovery.

IMF managing director Christine Lagarde said the US needed to put in place policies for sustainable, job-creating growth. She urged the country not to be ‘short-sighted as to what is needed from a structural point of view, both in terms of investment, but also in terms of fiscal approach’.

A key message was the implementation of a credible medium-term fiscal plan to bring down public debt and secure sustainability.

‘We say that, we have said that. We will probably continue saying that because we recognise that it’s quite difficult to achieve from a political point of view,’ Lagarde said.

‘However, we also acknowledge that there has been progress, clearly demonstrated by last year’s passage of the bi-partisan Budget Tax Act.’

Achieving fiscal sustainability required greater control of healthcare costs, the introduction of social security reforms, and an overhaul of the tax system, which the Lagarde said was too complex, had too many loopholes and exemptions and generates too little revenue.

‘Finally, I would highlight our recommendations on changes to the fiscal, institutional framework, the goal of which is to try to avoid the recent experience of debt ceiling brinkmanship and government shut downs,’ she added.

Lagarde also called on the US government to address poverty by sanctioning an expansion of the Earned Income Tax Credit and increasing the minimum wage. Wages in the US are among the lowest in advanced economies, she noted.

Meanwhile, the Organisation for Economic Co-operation and Development has warned that economic recovery in the US has been very slow by historical standards and would remain sluggish unless reforms were launched to boost growth.

OECD secretary-general Angel Gurría said: ‘The United States is doing better, but legacies of the crisis are heavy and there is a lot of room for improvement. As we gradually exit the gravest crisis of our lifetimes, we have the unique opportunity to push forward reforms which will lead to sustainable green growth and some inclusive societies.’

Like the IMF, Gurría urged the US to simplify the tax system, upgrade the skills of American workers, and encourage and facilitate participation in the labour market to reduce poverty.

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