IMF: U.S. Must Get Its Timing Right

Today, the IMF released the concluding statement of its Article IV Consultation, calling for the U.S. to pass a deficit reduction plan quickly but phase in implementation to avoid unduly harming the recovery. Their economic forecast shows a continued slow recovery ahead--even with much of the fiscal cliff averted--as real GDP growth is projected to average 2.0 and 2.3 percent in 2012 and 2013, respectively. Moving forward, they say the key for economic policy will be to get the timing right on stimulus and deficit reduction and to do both to an adequate degree.

IMF and CBO Projected Real Growth
  2012 2013 2014 2015 2016 2017 2013-2017 Average
IMF 2.0% 2.3% 2.8% 3.3% 3.4% 3.3% 3.0%
CBO 2.8% 0.5% 3.6% 4.9% 4.2% 3.3% 3.3%

Note: CBO growth is from CBO's current law scenario, adjusted for estimates from May

For the short term, the IMF says that a resolution as quickly as possible to the fiscal cliff and the debt ceiling would be beneficial, as well as some additional stimulus through means such as infrastructure spending. At the same time, they argue that the U.S. should agree on deficit reduction measures as soon as possible too, but implemented later on. In terms of deficit reduction, they say that the U.S. should aim to get a primary surplus (surplus excluding interest) of one percent of GDP in five years. This would result in debt held by the public declining to 70 percent of GDP by 2022 (and declining further thereafter). According to the CRFB Realistic Baseline, debt is on track to grow to about 85 percent of the economy by 2022.

As for the policies, they recommend:

  • With discretionary spending capped and defense outlays projected to fall significantly, policymakers’ attention must shift to entitlements such as pension and health benefits, the key driver of spending growth. The cost-saving provisions of the health care reform should be implemented fully and additional saving measures could be phased in gradually. The Social Security imbalances warrant an early reform, including a modest increase in the retirement age, a more progressive benefit structure, and higher contributions.
  • Revenues—which are low relative to GDP compared to other advanced economies—could be raised through a menu of options, including lower tax expenditures (which amount to some 7 percent of GDP and disproportionately benefit high-income taxpayers) the introduction of a VAT and carbon taxes, and higher marginal personal income tax rates. There is also room for improving the structure of corporate taxation, including by base-broadening, lowering marginal rates, and achieving a more efficient tax treatment of multinational enterprises.

The IMF has frequently argued for the importance of getting the timing of stimulus and deficit reduction to address the economic needs that are most pressing in the short and medium term. With the fiscal cliff approaching, it is essential that lawmakers heed this advice.