Tax cuts would help fuel the US economy this year and next, the IMF said on Thursday, adding that GDP growth would then slide to levels just half of what US President Donald Trump’s administration is forecasting.
In its annual assessment of the US economy, the IMF released a critical report that warned of adverse consequences from a number of administration policies, including its plans to impose punitive tariffs on major US trading partners in an effort to reduce the US’ huge trade deficits.
A trade war “gives no winner and we find generally losers on both sides,” IMF managing director Christine Lagarde said.
The US should “work constructively” with its trading partners to resolve disputes, refrain from imposing tariffs and avoid a tit-for-tat trade war in which other nations retaliate by enacting tariffs on US products, Lagarde said.
“The negative impact on the global economy would be serious,” Lagarde said at a news conference.
The IMF report marked the harshest assessment the lending agency has ever produced assessing the economic policies of its largest member country. It elicited a quick response from the Trump administration.
“We differ significantly on the medium term and long-term projections,” the US Department of the Treasury said. “The Treasury Department believes our policies, including the productivity-boosting mix of tax reform and regulatory relief, will result in more sustainable economic growth.”
The IMF believes that the administration’s economic policies could result in higher trade deficits in the near-term by driving up US domestic demand and making the dollar stronger, Lagarde said.
A stronger dollar makes imports cheaper for US consumers while making US exports more expensive on overseas markets.
The tax cuts, which would lead to a higher budget deficit, could result in a faster rise in inflation that would force the Fed to push interest rates up more quickly, she said, adding that it might result in increased instability in US and global financial markets.
The IMF projected that US growth will hit 2.9 percent this year and 2.7 percent next year.
Both are significant increases from last year’s 2.3 percent expansion.
However, after an initial boost from the US$1.5 trillion tax cut package, the IMF forecasts that growth will slow, dropping to 1.4 percent in 2023.
This forecast would be just half of the 3 percent growth target that the administration has said will be produced with its policies.
The IMF report was highly critical of Trump’s trade policies in particular. The administration has imposed punitive tariffs on a number of countries to slow imports of steel and aluminum, and has threatened to raise tariffs on up to US$150 billion in Chinese goods in response to complaints about China’s trade surplus and technology policies.
The administration was expected to release a list of US$50 billion in Chinese goods that will be targeted yesterday.
During the 2016 presidential campaign, Trump pledged that his economic program would boost the US growth rate to 4 percent or better, but his budgets have projected a lower goal of sustained gains of 3 percent per year.
With the tax cuts, and expected increases in defense and domestic programs, the federal budget deficit as a percentage of the total economy would exceed 4.5 percent of GDP by next year — nearly double what it was just three years ago, the IMF said.
Such a big boost in the US government deficit is “quite rare,” the IMF said.
It has not been seen since in the US since former president Lyndon Johnson in the late 1960s boosted spending on the Vietnam War at the same time as the country was adopting Johnson’s Great Society programs.
The IMF projected that federal government debt will exceed 90 percent of GDP by 2024.
To reduce deficits, the US might need to take politically painful steps such as trimming Social Security benefits and imposing higher taxes on consumers, the IMF said.
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