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IMF Warns U.S. Deficit A Danger
IMF warns U.S. deficit a danger
Could raise global interest rates, depress output and investment, new report says
By BARRIE MCKENNA
00:00 EST Thursday, January 08, 2004
WASHINGTON -- In a stinging indictment of the Bush administration's fiscal record, the International Monetary Fund has warned that the exploding U.S. budget deficit is dangerously exposing the global economy to higher interest rates and an even weaker dollar.
The Washington-based lender also took a swipe at a series of massive U.S. tax cuts, questioning whether they have produced significant economic gains while criticizing their impact on the deficit and their failure to shift the tax burden to consumers.
Left unchecked, the rising U.S. deficit could raise global interest rates by one-half to one percentage point, depressing global output and investment, according to the 66-page report released yesterday.
The report -- part of an annual consultation with the U.S. government -- cautioned that the United States is rapidly running out of time to shore up its finances.
"The experience of recent decades has shown that fiscal consolidation is difficult to achieve and perhaps even more difficult to hold on to," the report concluded. "The room for manoeuvre is narrowing quickly."
The IMF also raised the spectre that vital U.S. social programs, such as Social Security and Medicare, may be headed for bankruptcy just as the Baby Boom generation prepares to retire.
Speaking yesterday, U.S. Treasury Secretary John Snow expressed confidence that the rebounding economy would enable the government to cut the federal deficit in half within five years.
The deficit is expected to top $500-billion (U.S.) this year, or about 4.5 per cent of gross domestic product.
"This is not historically out of range and it is entirely manageable," Mr. Snow commented. "With adoption of the President's policies, our projections show a solid path toward cutting the deficit in half, toward a size that is below 2 per cent of GDP."
But even that won't be enough to deal with rising future demands of Medicare and Social Security, Charles Collyns, deputy director of the IMF's Western Hemisphere department, told reporters.
"Difficult social and political choices will need to be made," Mr. Collyns said. "Delaying will only increase the size of the problem."
He said he hoped the report helps spark a public debate as the race for November's presidential election gets under way.
The IMF says much more radical surgery is urgently needed. The report pointed out that closing the growing U.S. budget gap would require either a 60-per-cent "immediate and permanent" hike in personal and business income taxes or a 50-per-cent cut in Medicare and Social Security outlays.
The grim warnings -- eerily similar to ones issued to Canada a decade ago -- are the latest evidence of a deepening rift between the Bush administration and the184-member IMF.
In recent months, IMF managing director Horst Koehler has taken an uncharacteristically strident stance against U.S. economic policies. In October, for example, he highlighted the "alarming" rise in the U.S. current account deficit as an example of poor international economic co-operation.
"We are all in the same boat and this increasing interdependence requires as a minimum that each country give more consideration to the consequences of its actions on others," Mr. Koehler said in remarks aimed squarely at the Bush administration.
The new report is especially critical of recent U.S. tax cuts -- proposed by President George W. Bush and passed by Congress. The IMF acknowledged that the tax cuts have provided "valuable support" for the economic recovery. But the report found considerable evidence that over the longer term persistent deficits will inevitably "crowd out private investment and dampen output." They may also lower U.S. productivity by as much as half of a percentage point.
The report also noted the apparent abandonment by the administration of the long-held U.S. goal of achieving a balanced budget.
"Within only a few years, hard-won gains of the previous decade have been lost and, instead of budget surpluses, deficits are again projected as far as the eye can see," the report noted.
The IMF provided a list of possible options for U.S. policy makers, including letting the Bush tax cuts expire, raising taxes on gasoline and other forms of energy, reimposing tight Congressional spending controls and restructuring Social Security, as Canada has done.
"Given the magnitude of this adjustment, it would seem likely that both revenue measures and sustained spending restraints would need to be considered," the report concluded.
Mr. Snow, however, immediately took one option off the table -- letting the recent tax cuts expire.
"Let me be perfectly clear: Failure to make the tax relief permanent would be a huge mistake and would put our recovery in jeopardy," he said.
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