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See US Federal
Deficit Hits $126Billion in Fiscal First
Quarter @ http://www.washingtonpost.com/wp-dyn/articles/A1665-2004Jan8.html IMF continues warning on US
deficit By Shihoko Goto, UPI Senior Business Correspondent, Jan. 07,
2004, 5:37 PM WASHINGTON, Jan. 7 (UPI) -- The U.S. budget
deficit is burgeoning from rising defense and security spending, even as tax
cuts are lowering government revenue, amid increasing demands on the budget
from the retiring baby boom generation, the International Monetary Fund
cautioned once again Wednesday. But the IMF's warnings and its prescriptions
for dealing with the budgetary as well as trade deficits are unlikely to have
much impact on U.S. policymakers, if any, particularly in a presidential
election year. Since the Bush administration took over in
2001, the federal budget balance has deteriorated rapidly, and the government
deficit is expected to exceed 4 percent of gross domestic product for the
current fiscal year." And
that deficit is likely to be sustained...which raises longer-term issues,"
not just for the U.S. economy, but for overall global economic prospects, said
Charles Collyns, deputy director of the IMF's western hemisphere department in
a phone conference with reporters. The group released a study Wednesday on U.S.
fiscal policies and priorities for long-run stability, which Collyns said was
based on discussions with U.S. authorities over the summer. The IMF warned that the large fiscal
deficits will likely continue over the next decade as the administration keeps
on cutting taxes on the one hand, while increasing defense and social spending
on the other. That, in turn, could lead to a rise in interest rates, even
though the international agency did not specify by just how much monetary
policy could be tightened. It also noted that higher interest rates
would crowd out private sector investments and ultimately hamper business and
productivity growth as well as consumer spending. In the near-term, of course,
prospects for the U.S. economy and indeed the world economy, appear to be
looking much better than they did a year ago. With U.S. asset prices on the rise once again
and GDP outpacing analysts' expectations in the third quarter, a brighter
outlook for the U.S. economy has been key to improving prospects for both Japan
and Europe. Still, the IMF said that in the longer-term, the ballooning budget
deficit and net foreign liability position in the United States will be the
biggest dark spot in the global economy moving forward, and could
"eventually" raise real interest rates in industrialized nations by
0.50 to 1.00 percentage points." The United States is on course to increase its net external liabilities to around 40
percent of GDP within the next few years...this trend is likely to
put pressure on the U.S. dollar, particularly because the current account
deficit increasingly reflects low savings rather than high investment," the
IMF stated. The Bush administration has continuously
argued that the current account deficit largely stemmed from the fact that
foreign investors were attracted to U.S. markets, and would continue to put
their money in the United States, making a current account imbalance a
non-issue for the overall domestic economy. But the IMF's Collyns said while
such an argument may be true if the amount were smaller, he said the pace in which the deficit was growing as well as its sheer size made the current
account deficit a significant liability to U.S. economic prospects. At the same time, the IMF warned that the
evaporation of fiscal surpluses accumulated over the 1990s "has left the
budget less well-prepared to cope with the retirement of the baby boom generation,
which will begin later this decade and place massive pressure on the social
security and Medicare systems." "Without the cushion provided by earlier
surpluses, there is less time to address these programs' underlying insolvency
to address these programs' underlying insolvency before government deficits and
debt begin to increase unsustainably, making more urgent the need for
meaningful reform," the IMF added. As such, the international agency argued that
the United States should focus its economic policy on restoring a budget
balance, and quickly at that. While the IMF recognized the need for more
military and security spending in light of the terrorist attacks and new global
risks that need to be addressed, it nonetheless stressed the need for more
disciplined spending by the government. It also called for better, and broader,
ways of increasing the tax base, for example by reducing corporate and personal income tax preferences including
corporate tax shelters and mortgage interest deductibility. It also
reported that energy taxes "which
are comparatively light in the United States", could be a good way of
increasing government income. While economists may argue on whether the
IMF's assessment of the state of the U.S. economy and its suggestions for
dealing with the ballooning deficits, it is unlikely that U.S. policymakers
will take much, if any, of the IMF's warnings and suggestions to heart. For
one, neither the Republican nor Democratic administration has had a track
record of not taking much notice of what the IMF suggests about directing the
U.S. economy. But more
significantly, the United States is the single largest shareholder
in the IMF, and is effectively its boss. Unlike many developing nations or
countries in financial crises such as Argentina or Turkey, the United States is
the biggest provider of funds to the international agency. As such, it does not
borrow money from the IMF, and thus it is free from the so-called
conditionalities that the IMF would impose upon those countries that would
become borrowers of their funds. And given that the IMF is prescribing such measures such
as eliminating corporate tax shelters and introducing bigger energy taxes
as the nation gears up for a presidential election, such unpopular policies
suggested by an international organization are highly unlikely to gain much
support among U.S. policymakers. Copyright � 2001-2004 United Press International |
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