IMF: U.S. needs budget plan
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WASHINGTON (Reuters) -- The International Monetary Fund urged the United States to forge a clear plan to balance its budget.
Tax cuts had given the economy only a modest lift, and widening fiscal deficits hold dangers for domestic and global growth, IMF economists said in a report on Wednesday.
U.S. policymakers will need both tax increases and spending restraint to right the budget, the economists said.
"The deficit will be reduced by the cyclical expansion that is now under way, which will absorb spare capacity in the economy. But even assuming tight spending limits and a sharp rebound in revenues, this would still leave a deficit of around 2 percent of GDP with the economy operating at full capacity," Charles Collyns, deputy director of the IMF's Western Hemisphere Department, told reporters.
"How to deal with this structural deficit undoubtedly will require both tax and spending initiatives," he added.
The report said balancing the budget was key to avoid a rise in interest rates that posed significant risks not only for the U.S. but also for the rest of the world.
"With budget projections showing large federal fiscal deficits over the next decade, the recent emphasis on cutting taxes, boosting defense and security outlays, and spurring an economic recovery, may come at the eventual cost of upward pressure on interest rates, a crowding out of private investment, and an erosion of longer-term U.S. productivity growth," the report said.
It outlined the dangers of a growing and record shortfall in the U.S. current account -- the broadest measure of American trade with the rest of the world -- pointing out it could spoil foreign investors' appetite for U.S. assets and cause the dollar to weaken further.
The dollar has been falling for weeks against major currencies, reaching record lows against the euro and a three-year low against the Japanese yen.
Collyns said the decline of the dollar had been "fairly orderly" but had complicated economic policy management in the euro area and in Japan.
The U.S. budget swung from a surplus of 2.5 percent of gross domestic product in fiscal 2000 to a deficit of just under 4 percent in fiscal year 2003.
The IMF paper said moving the budget to balance would put the U.S. in a better position to deal with the massive fiscal pressures it will face as the baby boom generation starts to retire this decade.
"Without the cushion provided by earlier surpluses, there is less time to address these programs' underlying insolvency before government deficits and debt begin to increase unsustainably, making more urgent the need for meaningful reform," the report noted.
It said it was still an open question whether the $1.7 trillion in tax cuts won by President George W. Bush last year would do much to boost the economy long-term.
The Bush administration has contended that the 2003 round of tax cuts had played a major role in the recent acceleration in the recovery and would help the economy in the years ahead by giving it a "supply-side" boost.
The paper said U.S. fiscal policies had helped the recovery but the tax measures appeared to have only modestly shifted the tax burden from income to consumption.
Tax rates on dividends and capital gains were lowered, but the moves had not eliminated the double taxation of corporate income or increased savings from income, the paper said.
The measures also did little to address the complexity of the U.S. tax system, the IMF team said.
They said spending cuts would be difficult in the face of growing pressure for security and military-related priorities linked to Bush's war on terrorism.
The IMF team recommended the reintroduction of budget rules that would had put caps on a wide array of government spending, while requiring any new tax or spending initiatives be paid for elsewhere in the budget.
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Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
