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IMF: Tax cuts boosting US now but will hurt growth later

Thursday , June 14, 2018 - 11:14 AM

By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) — The International Monetary Fund said Thursday that tax cuts will help fuel the U.S. economy this year and next. But it warned that growth after that will slide to levels just half of what the Trump administration is forecasting.

In its annual assessment of the U.S. economy, the 189-nation 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 U.S. trading partners in an effort to reduce America’s huge trade deficits.

IMF Managing Director Christine Lagarde said that a trade war “gives no winner and we find generally losers on both sides.”

She encouraged the United States to “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 U.S. products.

“The negative impact on the global economy would be serious,” Lagarde told reporters at a briefing.

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 Treasury Department 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.”

Lagarde said the IMF believed the administration’s economic policies could result in higher trade deficits in the near-term by driving up U.S. domestic demand and making the dollar stronger. A stronger dollar makes imports cheaper for U.S. consumers while making U.S. exports more expensive on overseas markets.

She said the tax cuts, which would lead to a higher budget deficit, could result in a faster rise in inflation that would force the Federal Reserve to push interest rates up more quickly. That might result in increased instability in U.S. and global financial markets.

The IMF projected U.S. 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 $1.5 trillion tax cut package, the IMF forecasts growth will slow steadily in future years, 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 $150 billion in Chinese goods in response to complaints about China’s trade surplus and technology policies. The administration is expected to release a list of $50 billion in Chinese goods that will be targeted on Friday.

During the 2016 presidential campaign, Trump pledged his economic program would boost the U.S. growth rate to 4 percent or better. But his budgets have projected a lower goal of sustained gains of 3 percent per year.

The report said that with the tax cuts and expected increases in defense and domestic programs, the federal budget deficit as a percentage of the total economy will exceed 4.5 percent of GDP by next year — nearly double what it was just three years ago.

This big boost in the U.S. government deficit is “quite rare,” the IMF said. It has not been seen since in the United States since President Lyndon Johnson in the late 1960s boosted spending on the Vietnam War at the same time it was adopting the Johnson’s Great Society programs.

The IMF projected the level of the federal government’s debt will exceed 90 percent of GDP by 2024.

To reduce future deficits, the IMF suggested the US may need to take politically painful steps such as trimming Social Security benefits and imposing higher taxes on consumers.

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