WASHINGTON, June 27, (RTRS): The International Monetary Fund (IMF) on Tuesday cut its growth forecasts for the US economy to 2.1 percent for both 2017 and 2018, dropping its assumption that President Donald Trump’s tax cut and fiscal spending plans would boost growth.
The IMF, after a review of US economic policy, said the Trump administration was unlikely to achieve its goal of annual GDP growth of 3 percent over a sustained period, partly because the labor market is at a level consistent with full employment. The US economy grew 1.6 percent last year.
The assumed stimulus from expected tax cuts and new federal spending spurred the IMF earlier this year to bump up its US growth forecasts to 2.3 percent in 2017 and 2.5 percent in 2018.
The assumptions for those forecasts appeared to have evaporated in the face of a lack of details over the Trump tax plan and the $3.6 trillion in government spending cuts proposed in the administration’s budget plan in late May.
“We are removing that fiscal stimulus because now we have in front of Congress a budget that assumes an important fiscal consolidation in the next few years,” Alejandro Werner, head of the IMF’s Western Hemisphere Department, said in a press conference.
“Looking at the US data, it is unlikely that these set of policies can generate an acceleration of economic growth of a magnitude of let’s say approximately 1 percentage point.”
Trump, a Republican, campaigned last year on a pledge to swiftly cut taxes, roll back regulations and lift infrastructure spending, prompting many economists and investors to increase their US growth forecasts.
But details of the White House’s tax plan remain sparse as Trump advisers attempt to win over fiscally conservative Republicans in Congress who want any changes to ultimately be revenue-neutral.
The IMF said the Trump budget plan put a disproportionate share of spending cuts onto low- and middle-income households, adding that it “would appear counter to the budget’s goals of promoting safety and prosperity for all Americans.”
Instead, the Fund suggested a tax policy that would improve the federal revenue-to-GDP ratio, more balanced cuts that strengthen the social safety net’s efficiency, and efforts to contain healthcare cost inflation.
The IMF warned that “significant policy uncertainties imply larger-than-usual” risks to the US outlook on either side, since spending cuts could lower growth, while tax cuts could provide stimulus and expand the economy.
Even while the US is seeing its third longest expansion since 1850 and is at full employment, the world’s largest economy is facing rising public debt and an overvalued currency — which tends to hinder exports.
“A comprehensive policy package is needed,” the report said.
The fund welcomed the administration’s objectives to bring down debt and adjust spending policies “to finance priorities such as infrastructure.”
However, the discussions “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.”
In fact, the fund called into question the stated goal of the Trump administration to accelerate growth to more than three percent.
“The international experience and US history would suggest that a sustained acceleration in annual growth of more than 1 percentage points, as projected by the administration, is unlikely,” the report said.
The IMF called for policies to raise the potential growth rate of the US economy, including through improved education and training programs.
The fund however criticized the proposal put forth so far, with deep spending cuts “that, in the staff’s view, would seem to place a disproportionate share of the adjustment burden on low- and middle-income households.”
The report also warned against measures that would make the US less open to trade, even while there is room to modernize pacts like the North American Free Trade Agreement (NAFTA), a process Washington already has begun.
The United States “ought to be judicious in its use of import restrictions,” the fund said.