The International Monetary Fund reduced its outlook on the world biggest economy, the United States, to 2.1% from 2.3% in its World Economic Outlook in April 2017. The outlook is clouded by important medium-term imbalances according to the Fund. The IMF highlighted that the economic model is not working as well as it could in generating broadly shared income growth. Plagued by public debt and a moderately overvalued dollar according to the IMF, the external position is moderately weaker than implied by the medium term fundamentals and desirable policies. The nation’s current account deficit is expected to be around 3% of GDP over the medium term and the net international investment position has deteriorated markedly in previous years.
To tackle the shortcomings, the current administration intends a wide-ranging overhaul of policies. The administration is seeking to reduce the fiscal deficit and debt, to reprioritize public spending and a facelift for the tax system. According to the IMF in the Article IV consultation, “it became evident that many details about these plans are still undecided. Given these policy uncertainties, the IMF’s macroeconomic forecast uses a baseline assumption of unchanged policies. Specifically, it neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget.” As such the Fund expects growth of approximately 2.1% for 2017 driven by continued solid consumption growth and cyclical rebound in private investment.
The current administration’s priorities are centred on a faster economic and productive growth, stimulation to push job creation, incentives for business investment, balancing the budget, reducing public debt and the creation of fiscal space to finance priorities such as infrastructure. The objectives however according to the IMF, “are welcomed but the consultation revealed differences on a range of policies and left open questions as to whether the administration’s proposed policy strategies are best suited to achieve their intended purpose.” Given this, the administration has sought to incorporate multiple reforms on the tax system, improving education, reprioritizing federal spending, improving the effectiveness of the regulatory system and reforming the immigration and welfare systems. If successful, the IMF notes, “the right policy package represents an upside risk to growth and would serve to ensure a broad-based improvement in living standards.”
With the world’s largest economy nearing full employment according to the Fund, it is imperative that the administration implement the right policy mix. According to the IMF this includes, “gradually removing both fiscal and monetary support and refocusing efforts on expanding potential growth, raising competitiveness, and strengthening the supply side.” The implementation of a suitable policy mix may lead to a “lower the current account deficit and improve the net international investment position, reduce the overvaluation of the U.S. dollar, and have positive spillovers to others.”
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