IMF urges US to cut debt, proposes tax hikes, spending cuts

It lowers its growth forecast for 2024 slightly to 2.6%.

Madrid, June 28 (Europa Press) –

The IMF wanted to urge the United States to make an effort to balance its public accounts, by pointing out that high levels of deficits and debt pose a growing risk to the U.S. and global economies, and that this problem must be addressed urgently through fiscal consolidation measures, including tax increases and spending adjustments.

“There is an urgent need to reverse the current increase in the public debt-to-GDP ratio,” the Washington-based international institution said in the conclusions of its annual “Article IV” report on the US economy, in which it revised down by a tenth the public debt-to-GDP ratio. It lowered its GDP growth forecast for this year to 2.6%, while maintaining its April forecast of a 1.9% expansion in 2025.

“The US economy has proven to be strong, dynamic and adaptable to changing global conditions,” summarize IMF technicians, whose activity and employment continue to exceed expectations, while the process of slowing inflation has been much less costly than many feared.

However, the IMF mission warns that the fiscal deficit is “very large,” creating a sustainable upward trajectory for the public debt-to-GDP ratio, suggesting that the deficit and debt will remain well above the medium-term projections before the pandemic.

In fact, under current policies, the IMF estimates that government debt will rise steadily and exceed 140% of GDP by 2032, keeping the deficit around 2.5% of GDP above the normal levels planned before the pandemic.

The document notes that “these high deficits and debts create increased risks to the U.S. and global economies, potentially generating higher financing costs.”

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In this sense, the IMF sees the chronic fiscal deficit as a major and persistent policy imbalance that “must be addressed urgently,” and stresses that putting the debt-to-GDP ratio on a clear downward path requires early fiscal adjustment.

In this way, he proposes tax and spending options to achieve this adjustment in the medium term, although he stresses that the measures must go beyond finding efficiencies in non-defense-related discretionary federal spending, and that the authorities will have to carefully consider increasing indirect taxes, as well as gradually increasing income taxes, eliminating a series of tax expenditures and reforming social benefit programs.

The IMF acknowledges that “implementing these measures will require difficult political decisions over several years,” adding that some of the financial savings resulting from these efforts should be used to increase spending on poverty alleviation programs.

Financial stability.

On the other hand, despite the decline in risks to financial stability a year ago, and the implementation of some reforms in the sector, the IMF lacks concrete measures to mitigate the vulnerabilities in the banking system that came to light in 2023.

“There are no concrete measures to mitigate the vulnerabilities in the banking system that came to light in 2023, including failures in banking supervision, the large proportion of uninsured deposits and the risks arising from the regulatory ‘adjustment’ that took place in 2018,” he points out.

Therefore, it is essential that the institution fully implements the final components of Basel III, applying similar regulatory requirements to all banks with assets of at least $100 billion (€93,455 million), as well as strengthening supervisory and supervisory practices. Reconsidering deposit insurance coverage, and recalibrating banks’ liquidity requirements.

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In addition, there is also a continuing need to increase the flexibility of non-bank mortgage companies, especially given the critical role they play in servicing a large percentage of mortgage loans in the United States.

Aileen Morales

"Beer nerd. Food fanatic. Alcohol scholar. Tv practitioner. Writer. Troublemaker. Falls down a lot."

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