IMF to Obama: Cut the Deficit by Raising Taxes
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IMF to Obama: Cut the Deficit by Raising Taxes

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WASHINGTON – The International Monetary Fund told the United States on Thursday that it should set tougher goals than President Obama has recommended for reducing the federal budget deficit. The United States can ignore the new report, but it is certain to heat up the furious battles over both short-term and long-term budget choices, including within Obama's fiscal commission.

In its new assessment of the United States, the IMF said that economic growth is likely to be slower and deficits higher than the White House is predicting.

Offering specific recommendations, the international agency said the United States should consider a wide array of tax increases over the next several years. Among them: a reduction in the deduction for home mortgage interest; higher energy taxes; a national consumption tax; and a tax on financial transactions.

“Given that we use less optimistic economic assumptions than the Administration, we see the need for a more ambitious adjustment to stabilize debt than that envisioned by the authorities,’’ the IMF said in its report.

Both Democratic and Republican administrations have ignored previous IMF warnings about the size of its budget and trade deficits, and these proposals are probably too drastic or controversial for Congress to address in the near future. The short-term issues are about whether to start reducing the deficit right now or to keep spending for another year to both stimulate the weak economy and provide assistance to people hurt by the downturn.

The IMF conceded that some additional spending might be appropriate, but it warned that any measures should be “carefully targeted” and be offset as much as possible by either spending cuts or tax increases.

The IMF’s bigger clash with the Obama administration was how aggressively to tackle the deficit over the next five years. Obama has called for reaching a “primary” budget balance – meaning that revenues cover all spending except for interest payments on the debt – by 2015. The IMF, by contrast, called for achieving a small but significant primary budget surplus. And because the IMF expects annual economic growth to be slower than what the White House predicts, it called for much tougher measures over the next few years.

Administration officials quickly distanced themselves from the report.

“We believe that their economic projections over the next decade are overly pessimistic, particularly compared to the consensus of private sector economists,’’ said one administration official.

Martin Baily, a senior economist at the Brookings Institution and a former top economic adviser to President Clinton, said he thought the IMF approach would run the risk of jeopardizing the recovery at a time when growth already appears to be slowing.

“It’s a very delicate balance,’’ Baily said in an interview on Thursday. “If it were me, I wouldn’t do anything dramatic right now. I would probably do a small amount of stimulus, and see what happens.”

Over the longer term, the IMF’s recommendations would provoke furious opposition from Republican lawmakers, most of whom have vowed to fight any and all proposals for higher taxes. Republicans already oppose proposals to raise taxes on fossil fuels.

But politicians in both parties would fight many of the other proposals, especially on reducing or eliminating the tax deduction for homeowners on mortgage interest payments. That deduction is one of the biggest and most expensive tax breaks in the entire tax code and it has been staunchly defended by the real estate and home-building industries.

Proposals for a broad consumption tax are popular with many economists, but they would attract heavy opposition. Conservatives fear that a “value-added tax,’’ a sales tax that is one form of a consumption tax, would become a huge money machine for the government and provoke runaway spending. But many liberals fear that a consumption tax would disproportionately hit lower-income people.

The IMF report added new urgency to the deliberations by President Obama’s bipartisan fiscal commission, which is supposed to come up with recommendations on reducing the deficit by Dec. 1. In pushing for even more aggressive action than the president proposed, and in explicitly mentioning a range of possible tax increases, the report could open a broader debate among the commission’s 18 members.

The commission’s Democratic co-chairman, Erskine B. Bowles, suggested at the panel’s meeting on June 30 that they agree on a goal of balancing both tax revenues and spending at 21 percent of gross domestic product. That would be a big jump in taxes, which have averaged about 18 percent of G.D.P. in recent decades, and a big drop in spending, which is running at nearly 25 percent of G.D.P.

But the commission has yet to agree on either its overall goals or any specific ways to reach them. On Thursday, commission officials declined to comment on the IMF report.