IMF finds lack of certainty for US economy

27 Jun 17

The International Monetary Fund has said its annual health check of the US economy has been hampered by a lack of certainty on economic and fiscal policy.

Today’s Article IV report, the first on the US economy since Donald Trump came to power in January this year, noted that the American economy is enjoying its third longest expansion since 1850.

However, it also highlighted some medium-term imbalance, notably rising public debt and an over-valued dollar.

While the current US administration plans to reduce the fiscal deficit and debt, reprioritise public spending and overhaul the tax system, the IMF said: “During the Article IV consultation it became evident that many details about these plans are still undecided.”

It therefore made its macroeconomic forecasts on the basis of unchanged policies.

Under this modelling, growth is expected to rise modestly by 2.1% this year and next, driven by consumption and a revival in private investment.

This represents a downgrade of IMF expectations of the US economy announced earlier this year.

The lack of policy certainty however amplifies risks, the watchdog said. “On the one hand, a medium-term path of fiscal consolidation, such as that proposed in the budget, would result in a growth rate that is below this baseline,” the IMF said.

“On the other hand, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus to the economy, raising near-term growth (and possibly potential growth), but with negative implications for debt sustainability and the current account imbalance.”

While the US administration’s policy objectives of faster growth, improved productivity, job creation and business and infrastructure investment were welcome, the IMF said “the consultation revealed differences on a range of policies and left open questions as to whether the administration’s proposed policy strategies are best suited to achieve their intended purpose”.

Elsewhere, the IMF said the US tax system was in need of fundamental reform and radical simplification.

On healthcare, provision for which could be cut back under current Republican plans, the IMF said the coverage gains made since the financial crisis should be protected and cost inflation maintained.

“Doing so will have positive implications for well-being, productivity, and labor force participation. “This, in turn, will strengthen growth and job creation, reduce economic insecurity associated with the lack of health coverage, and have positive effects for the medium-term fiscal position.”

The IMF board is set to discuss the consultation findings at a meeting on 24 July.

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