IMF Article IV Consultation With The USA

by Mike Godfrey, Tax-News.com, Washington

22 June 2009

John Lipsey, First Deputy Managing Director of the IMF has advised a press conference that it has been possible to revise forecasts of US performance upwards, with better figures expected imminently, leading to sustainable recovery by Spring 2010. However house price declines, concerns about fiscal sustainability and corporate distress are expected to continue apace and the US faces three interdependent challenges according to the IMF:

• Completing near-term economic and financial stabilization;
• developing strategies for unwinding massive public interventions; and
• addressing the longer term legacies of the crisis including the financial system and worsened fiscal imbalances.

The IMF mission concluding statement describes the government's post Lehmann policy response as much more effective and comprehensive, including large monetary and fiscal stimulus, the latter consistent with the targets agreed by the G-20; action to mitigate strains on housing markets; and a wide range of measures to restore financial stability. The considerable information disseminated about their initiatives, seen most recently with the Supervisory Capital Assessment Program (SCAP), has played an important role in thawing frozen markets, says the IMF. The IMF expects GDP to contract by 2.5% in 2009, followed by a modest 0.75% expansion in 2010. Meanwhile, growing economic slack, with unemployment peaking at close to 10% in 2010, would push core inflation to very low levels, with the headline CPI expected to decrease by 0.5% in 2009 and increase by 1% in 2010.

The IMF still forecasts a serious and enduring deterioration in public finances, exacerbating the already large challenges of swelling entitlement costs. 'Over 2009−11, federal deficits will average 9% of GDP, and that debt held by the public will nearly double to 75% of GDP; with debt maturities having shortened, gross financing requirements are projected at 30% of GDP, about double pre-crisis levels', says the IMF. The IMF expects 'significant pressure on Treasury bond rates, which, along with lower potential growth, will add to fiscal challenges'. Further fiscal risks could range from private pension and state finance demands to further financial sector support spending needs, according to the IMF.

The IMF considers that appropriate medium-term fiscal objectives, including an early stabilization of public debt, have been suitably transparent with the presentation of 10 year forecasts and more realistic assumptions about defense spending and tax policy. However the IMF called for significantly greater debt reduction, around 3.5% of GDP through 2019, in order to achieve the medium-term debt path set out in the budget. In the opinion of the IMF, tax revenue will need to rise, perhaps to include base broadening through reductions in tax concessions, introducing a federal consumption tax, raising energy taxes, and strengthening compliance.

The Administration’s focus on health care reform, the key long term risk, is highly regarded by the IMF because, through the goals of achieving fully-funded universal health care, it aims to reduce growth costs by 1.5% per annum. However, the IMF feels that cost reduction measures, essential to stabilizing Medicare/Medicaid finances, are very difficult to assess, as they rely on strengthening incentives for patients and private providers to economize. Accordingly, health costs will need to be closely monitored and additional measures taken promptly if economies fail to materialize.

'Household savings are expected to continue to rise as households rebuild balance sheets, which, along with some fiscal consolidation and tighter financial conditions, would cement the recent reduction in the current account deficit and bring it to a more sustainable level over the medium term,' the report stated, continuing: 'In the foreseeable future the US consumer is unlikely to play the role of global buyer of last resort.' In the press conference the IMF representatives further emphasized that the success of this overall policy is heavily dependant on major emerging economies, such as China and India, increasing domestic demand and reducing their dependence on exports to address the global imbalances. The IMF regretted that these global imbalances now need to be addressed urgently as a result of the crisis, rather than function as a gradual process, as recommended for a long time, most notably during their multilateral consultations on global imbalances in 2006-2007. After recent depreciation, the IMF assessors consider that the US dollar is presently only modestly above the level implied by medium-term fundamentals; that said, much will also depend on the evolution of foreign demand for US assets, underscoring the importance of fiscal and financial market reforms, in the view of the IMF.

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