IMF calls for deficit cuts in US
Posted by aangsunu on 9 July 2010
Source : Associated Press via Yahoo Finance
Martin Crutsinger, AP Economics Writer, On Thursday July 8, 2010,
WASHINGTON (AP) — The International Monetary Fund is calling for the United States to make a stronger effort to curb its budget deficits.
The IMF said Thursday that in addition to cutting government spending, the Obama administration will have to consider raising taxes to get the U.S. deficit down to a manageable level.
The IMF proposed a range of possible tax increases that would be certain to generate huge political opposition, from reducing the popular tax deduction for home mortgages to instituting a national sales tax.
The IMF report said that the U.S. economic recovery was becoming “increasingly well established” but it warned that the risks remained on the downside.
Among the threats, the IMF said, were the possibility of a double-dip recession in housing, continued deterioration in commercial real estate and the threats posed to the U.S. economy from the European debt crisis.
But the IMF said so far the U.S. rebound “has proved stronger than we had earlier expected” thanks in large part to what it called a “powerful and effective policy response” on the part of the government, including the efforts of the Federal Reserve.
But the 185-nation international lending agency was less positive about the outlook for the U.S. government deficits going forward.
It noted that because of the recession and the government’s spending to battle the downturn, the amount of U.S. government debt held by the public has almost doubled since 2007 and now stands at 64 percent of the economy as measured by the gross domestic product, the highest level since 1950.
The IMF said it projected that under current government policies, that debt burden would grow to 95 percent of GDP by 2020 and climb to 135 percent of GDP by 2030.
The IMF said that the Obama administration’s goals of cutting the annual budget deficit in half as a percentage of the GDP by 2013 and stabilizing the public debt at just over 70 percent of GDP by 2015 were welcome.
But the IMF said it believed a more ambitious effort would need to be launched to achieve those goals.
Reacting to the report, a U.S. official said that the IMF had used forecasts for economic growth and interest rates that were too pessimistic compared to the consensus of most private forecasters and this had the impact of inflating the government’s deficit problem over the next decade.
“While we share the IMF’s assessment of the importance of President Obama’s plan to cut the deficit in half and help spur a strong recovery, we believe that their economic projections over the next decade are overly pessimistic,” said the official, who spoke on condition of anonymity because he was not authorized to speak on the record.
The IMF praised the administration’s proposed three-year freeze on non-security discretionary spending but said using less optimistic assumptions about the economy, more will need to be done to trim deficits, including raising taxes.
It put forward a range of proposals from trimming the mortgage interest deduction to imposing higher taxes on energy or implementing a national sales tax saying the problems would grow in the future as the baby boomers make greater demands on Social Security and Medicare.
“Looking beyond 2015, the aim should be to put public debt firmly on a downward path to rebuild the room for fiscal maneuver, especially given the risks from large funding shortfalls in state and local government pension and health” programs, the IMF said.
In a statement, the Treasury Department said that the IMF review represented that “independent judgment and assessment” of the IMF staff.