IMF Welcomes Bush’s Attempts To Reduce Budget Deficit

by Leroy Baker, Tax-News.com, New York

01 June 2005

In its annual review of the United States economy, the International Monetary Fund applauded the Bush administration's efforts to reduce the budget deficit, although it criticized current budget plans for being somewhat un-ambitious.

The IMF's annual Article IV consultation noted that the US continues to act as the "main locomotive" of global economic growth, observing that productivity growth and high corporate profits have solidified a strong rebound in business investment and employment growth.

However, the IMF foresees US economic growth leveling off at 3.5% over the next two years as the recovery "matures."

In its concluding statement, the IMF mission stated that:

"The FY 2004 outturn was significantly better than expected; recent tax revenue data suggest overperformance in FY 2005; and this year’s Budget Resolution has endorsed the goal of halving the nominal deficit by FY 2009."

"That said, budget targets for next year and beyond do not appear ambitious — the structural budget balance would only improve by around 1½ percent of GDP through FY 2009. Moreover, the assumed compression in the ratio of nondefense discretionary spending is unprecedented, and no account has been taken of funding for operations in Iraq and Afghanistan after FY 2006 or of pressures to limit the growing scope of the Alternative Minimum Tax."

"Annual reductions in the fiscal deficit of roughly 1 percent of GDP through structural measures over the next few years — aimed at achieving a balanced budget excluding Social Security early in the next decade — would ease the burden on monetary policy to contain inflation pressures as the economy returns to full employment and could likely be achieved without placing an undue drag on activity."

"It would also support national saving, domestic investment, and the external position, forming an important pillar in the international strategy for reducing external imbalances and the associated vulnerabilities. Most importantly, by significantly lowering the federal debt ratio over time, it would provide fiscal room to cope with impending pressures on health and retirement programs and reduce the burden on future generations."

"The President’s Advisory Panel on Federal Tax Reform has been charged with reporting on ways to simplify the tax system and improve its efficiency — an undertaking that the mission strongly supports — in a revenue-neutral manner. However, the magnitude of the fiscal adjustment needed and the strict spending discipline already assumed make it seem prudent to explore options for revenue enhancements. Measures that would help avoid having to unwind recent tax rate cuts and their associated supply-side benefits include broadening the income tax base by curbing deductions, such as the generous treatment of mortgage interest, or introducing a national consumption-based tax."

"Both domestic and international experience suggests that legislated budget rules can be helpful in enhancing budget discipline, particularly if supported by political consensus. However, the expiration of the Budget Enforcement Act (BEA) seems to have coincided with a weakening of fiscal discipline, including through the use of sunset provisions in recent tax legislation. The Administration has re-iterated its support for a number of useful proposals, but it is unfortunate that these have not been carried forward, and that pay-as-you-go provisions would be limited to expenditure measures."

The full text of the Concluding Statement of the IMF's Article IV Consultation With The United States can be found in the Tax News Resources section.

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