The International Monetary Fund said that despite the recent gains in paring the deficit, the US government's long-term debt profile remained unsustainable. The IMF said the government needs to enact fresh income measures, including the introduction of a carbon tax, to strengthen its finances over the long term, among other measures.
The United States could spur growth by adopting a more balanced and gradual pace of fiscal consolidation, especially at a time when monetary policy has limited room to support the recovery further, the International Monetary Fund said after wrapping up its annual review of the world’s largest economy.
“There are signs that the U.S. recovery is gaining ground and becoming more durable. However, it has a way to go before returning to full strength. The IMF’s advice is to slow down, but hurry up: meaning slow the fiscal adjustment this year—which would help sustain growth and job creation—but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability,” Managing Director Christine Lagarde said.
Despite some improvements in economic indicators, particularly in the housing market, the very rapid pace of deficit reduction (including automatic spending cuts known as the sequester) is slowing growth significantly, the IMF said. U.S growth is expected to slow to 1.9 percent in 2013, from 2.2 percent in 2012. This projection reflects the impact of the sequester, and the expiration of the payroll tax cut and the increase in tax rates for high-income taxpayers.
Growth could pick up to 2.7 percent next year with a more moderate fiscal adjustment and a further strengthening of the housing market, the IMF said.
In its assessment, the IMF emphasized a fiscal policy strategy to deal with this challenge, including the need to adopt a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability. New revenues could be raised through a reduction in tax exemptions and deductions, as well as though the introduction of a carbon tax and a value added tax. Spending measures would need to curb the growth in public health care and pension outlays.The IMF also stressed the crucial importance of monetary policy.
“Unusual times demand unusual policies and unusual care in managing risks,” said Lagarde.