IMF Highlights Need For a Fiscal Plan
Earlier this week, the IMF released its latest World Economic Outlook (WEO), with a section devoted to the fiscal situation of the U.S. The IMF aptly reminds us that putting in place measures to gradually stabilize and reduce debt needs to be the "first priority" for U.S. lawmakers.
As the IMF said:
"The first priority for the U.S. authorities is to commit to a credible fiscal policy agenda that places public debt on a sustainable track over the mediumterm, while supporting the near-term recovery. For this, the fiscal consolidation plan should be based on realistic macroeconomic assumptions and should comprise entitlement reform and revenue-raising measures (for example, gradual removal of loopholes and deductions in the tax system and enhanced indirect taxes). This would allow the near-term fiscal policy stance to be more attuned to the cycle...
More fundamentally, delays in accomplishing an adequate medium term debt-reduction plan could suddenly induce an increase in the U.S. risk premium, with major global ramifications. As recently observed, shocks to the U.S. bond and stock markets tend to reverberate through major economies, and U.S. interest rate shocks have a strong bearing on emerging market spreads."
While it may seem like a broken record at this point, the IMF, like many other organizations and individuals note that the longer we wait on passing a long-term debt solution, the more investor, business, and consumer confidence can be drained. In addition, failure by the Super Committee to meet its mandate would trigger $1.2 trillion in budget cuts, which would not inspire any confidence in the political system and would represent a more front-loaded approach to deficit reduction than what many other fiscal plans have called for (who phased in cuts slowly to avoid harming the economy too much).
Overall, the IMF's report once again emphasizes the need for a fiscal plan, and the Super Committee presents a perfect opportunity for getting there.