The Strategist

IMF: Fiscal policy won’t help accelerate the US growth

06/28/2017 - 10:08

Acceleration of growth in the US has been postponed. Reduction of taxes and other fiscal measures that were supposed to support the economy of this country, are not yet detailed and, even more, are calculated on the basis of unrealistic growth indicators. This conclusion was reached by the International Monetary Fund (IMF) following consultations with the US authorities. Unlike the US Treasury, the fund proposes not to mitigate, but to tighten fiscal policy, in particular, by increasing taxes on consumption.

The IMF yesterday lowered the forecast for the growth of the US economy to 2.1% for 2017 and 2018, from 2.3% and 2.5%, respectively. In January of this year, the growth estimates were raised against the expectations of a fiscal reform, suggesting a reduction in tax rates and an increase in state investments in infrastructure. The same factor helped to improve global forecasts. However, as the fund informed, during consultations with the US authorities it was found out that many details of the plan are not yet clear, and the growth indicators put into the new budget plan are too optimistic.

The IMF’s updated forecast does not take into account the revision of fiscal policy. The growth will be supported by growing consumer demand (by 2-2.3%) and private sector investments (plus 4.4-4.9%), while the contribution of net exports will remain negative (minus 0.4% both years against minus 0,1% in 2016). In the medium term, growth rates will slow to 1.8%, as the effect of cyclical recovery will weaken. The fund notes that in conditions of full employment it is necessary to gradually reduce both monetary and fiscal measures to stimulate growth. So, the Fed should raise rates and reduce the volume of assets on the balance sheet.

Explaining its decision, the IMF focused on the US fiscal policy. Recall, the budget-2018, prepared by the administration of Donald Trump in May, simultaneously reduces the tax burden and increases spending on infrastructure with a parallel reduction in the level of public debt. The assumption of the self-sufficiency of the tax plan is built on the expectation of US GDP growth by 3% since 2021. The fund indicates that such a large-scale reduction in government spending will lead to a slowdown in growth, while a fall in revenues will worsen the situation with the national debt (according to the plan of the Ministry of Finance, the level of debt to GDP is reduced from 77% to 60% of GDP).

"Even if the ideal balance of stimulus measures is applied, growth will not accelerate to 3%, and the effect of these measures will not materialize soon", the IMF warned, pointing out that historically such flounces were contributed by growing number of the workforce, raised government spending and exports. "This is unlikely in the current situation," the fund commented.

Unlike the US Treasury, the fund proposed to conduct fiscal consolidation in order to restrain the increase in public debt, which would ensure a surplus of the primary budget of 1%, starting in 2018. Now in 2017, a deficit of 1.5% is laid (taking into account the repayment of the debt - 2.9%). The fund does not support a sharp cut in social spending, suggesting a change in the tax regime (by simplifying the system, reducing corporate tax rates and switching to a territorial taxation principle, while increasing taxes on consumption and renouncing a number of benefits), as well as raising the retirement age and reforming the health system in order to moderate the growth of costs.