The tax cuts and spending increases enacted by the Trump administration and Congress will increase the risks to the U.S. and global economy, the International Monetary Fund said Thursday in an annual assessment.
The report said that the Republican tax cuts will provide a short-term boost to the economy, but that annual growth will quickly return to its earlier trend, slumping to 1.9 percent in 2020 and 1.4 percent by 2023.
“The near-term outlook for the U.S. economy is one of strong growth and job creation,” the report said. “However, despite good near-term prospects, a number of vulnerabilities are being built-up for the medium-term.”
The report warned that the new tax cuts and spending hikes will increase the federal budget deficit to more than 4.5 percent of GDP by 2019 — nearly double what it was just three years ago. “The increase in the federal deficit will exacerbate an already unsustainable upward dynamic in the public debt-to-GDP ratio,” the report warned.
It added that larger deficits will leave little budgetary room for some “urgently needed” investments, including in infrastructure, that would provide longer-term boosts to growth and help raise living standards.
The report also said that the U.S. fiscal stimulus raises the risk of an “inflation surprise” that could force the Federal Reserve to raise interest rates faster than expected, causing volatility and market disruptions — and pain for leveraged households and businesses.
The IMF recommended that the U.S. take steps to lower its debt-to-GDP ratio, including:
- Reforming Social Security by lifting the cap on the payroll tax, raising the retirement age, indexing benefits to a lower measure of inflation and making the benefit structure more progressive
- “Containing healthcare cost inflation” by using technology to increase efficiency and changing healthcare provider payment mechanisms.
- Raising federal revenue by introducing a carbon tax, a federal consumption tax and a higher gas tax.
The Treasury Department said it shared the IMF’s positive short-term outlook, but that it differed significantly on the medium- and long-term forecast: “The Treasury Department believes that our policies, including the productivity-boosting mix of tax reform and regulatory relief, will result in more sustainable economic growth.”