The US economy’s outlook is favourable and interest rates need not be raised until the recovery gathers steam, according to a new International Monetary Fund (IMF) report notable for its criticism of the Bush administration’s economic performance.
In the lender’s annual assessment of the world’s richest economy, placed on the US Treasury’s website without fanfare late on Friday, the IMF said: ”The Fed has some room to wait until the recovery is more clearly established before acting, given the minimal signs of impending inflation pressures and the still uncertain economic outlook.”
The powerful US central bank last cut its key short-term interest rate target in December 2001 to 1,75% percent, a four-decade low. The Federal Reserve meets this week to set interest-rate policy and is expected to leave borrowing costs unchanged.
But the IMF cautioned the Federal Reserve to remain wary of ”the possibility that delaying action would require larger and more disruptive policy adjustments later on”.
The IMF said it expects growth to moderate from the rapid 5,6% annual pace of expansion seen in the first quarter, but nevertheless sees the recovery being sustained by an uptick in business investment and strong consumer spending.
But it said ”important uncertainties remain”, notably the prospects for corporate profits and investment, household demand strength and the large US trade deficit.
Critical report
The report was critical of the Bush administration’s handling of fiscal policy — something it was happier with during the Clinton years when the budget was balanced.
”The fiscal outlook has deteriorated markedly over the past year,” it said, while also panning recent US trade policy.
The international lender, best known for its dealings with economically troubled nations like Argentina and Turkey, also offers annual economic advice to its richer member nations.
While many of those appraisals are notable for their lack of criticism of governments’ policy actions, the latest US report card took issue with the Bush administration’s actions.
On the fiscal front, the IMF said projections of a unified surplus of 2,5% of gross domestic product for fiscal 2002 had evaporated in the past year into a likely one precent deficit. The report also noted that while the budget projects surpluses after fiscal 2004, deficits would remain after excluding the surpluses of Social Security trust funds. It added: ”medium-term fiscal projections could be optimistic”.
The Bush administration has proposed meeting higher military and security spending through cuts elsewhere, something the IMF said, ”could be difficult to sustain, especially given the apparent weakening of fiscal discipline”.
Indeed, the report said that the fiscal position has deteriorated so much that, ”consideration may need to be given to revenue measures” — IMF code for either raising taxes or reducing tax breaks offered to households and companies. Without such measures, it said, ”the pending cuts in marginal income tax rates may need to be reconsidered”.
But if American taxpayers might worry that the Bush administration is about to hike taxes to keep the IMF happy, they can take solace in the fact that Republican presidents religiously ignored similar IMF advice throughout the 1980s.
The report said budget projections may also, ”significantly understate the growth of Medicare outlays”.
Moreover, the lender said it cannot rule out a further erosion of tax revenues as a ratio of gross domestic product.
Calling for a return to a balanced budget, the report said longer-run fiscal pressures from an aging population ”remain worrisome”. Placing Social Security and Medicare on a sounder financial footing was also needed, the IMF said.
But it was on trade matters that the IMF was most critical. It said the measures taken to protect the steel industry, appear ”likely to impose significant costs both domestically and abroad and, by raising trade tensions, could undermine momentum for multilateral trade liberalisation”.
It also said massive farm subsidies ”were damaging from both a domestic and international perspective” and will ”encourage production of crops already in chronic oversupply and adversely affect producers abroad, while also undermining domestic fiscal objectives”.
The IMF also panned the paltry 0,1% of economic output America earmarks for overseas aid, saying that even plans in place to increase that amount would leave the world’s richest nation as ”the lowest among industrial countries” when it comes to helping those in need. – Reuters