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IMF Downgrades US Growth Prospects as Trump's Fiscal Package Lags Behind

© AFP 2023 / MANDEL NGANThe seal of the International Monetary Fund is seen at the headquarters building in Washington, DC on July 5, 2015
The seal of the International Monetary Fund is seen at the headquarters building in Washington, DC on July 5, 2015 - Sputnik International
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The IMF lowered its outlook on US economic prospects because the current US growth model is broken, and the Trump administration is taking too long to mend it.

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Kristian Rouz – The International Monetary Fund (IMF) cut its outlook on the US economic expansion for this year and 2018, saying that President Donald Trump’s target growth of 3 percent per year is not realistic given the current circumstances.

The key to acceleration in the US economy is the Trump-proposed fiscal stimulus package, including higher infrastructure spending and lower taxes, however, the package is already taking too long to coordinate and implement, mainly due to Washington partisan politics.

The IMF said they are expecting the US economy to grow by 2.1 percent this year, compared to an earlier projection of 2.3 percent made in April. In 2018, the Fund said, the US economy will expand by 2.1 percent as well, rather than the earlier expected acceleration to 2.5 percent. The US economy is suffering from long-lasting structural issues, the IMF pointed out, such as low labour productivity and an aging population, from which many other issues, such as low labour participation rate, stem.

A solution to these challenges would be the Trump=proposed fiscal stimulus, the Fund admits, but it is taking the White House too long to actually deliver on their fiscal programme promises. The US economy, in its current shape, the Fund said, is going at its fastest possible, because the unemployment is very low, at 4.3 percent, meaning it is the lack of reform that is holding the GDP growth back.

“The US is effectively at full employment,” the IMF said. “For policy changes to be successful in achieving sustained, higher growth they would need to raise the US potential growth path.”

The IMF criticised the White House because of its "still evolving policy plans", and the presumable positive effects of Trump’s fiscal stimulus have therefore been removed from the Fund’s assessments of the US economic prospects.

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The problem with the fiscal stimulus and why it is taking so long to coordinate is that because Trump and his team are facing stiff resistance from the Democratic Party and some of the Republicans. The GOP wants the economic reform to adhere to the budget neutrality principle, meaning that they do not want the Trump administration to go deeper in debt to finance their reform hoping for the subsequent increase in budget revenues. The

Democrats are simply opposed to any Trump initiative whatsoever because the lack of progress on Trump’s reforms, they assume, brightens their electoral prospects from 2018 and 2020.

Meanwhile, the existing US economic growth model is dysfunctional and inefficient, the IMF observed.

“The US economic model is not working as well as it could in generating broadly shared income growth,” the Fund said. “Most critically, relative to historical performance, post-crisis growth has been too low and too unequal.”

Trump claims, backed by his team of high-ranking economists with backgrounds in the US financial sector and Main Street economy, that his plans to boost infrastructure spending by $200 bln from the US budget, and another $800 bln from private investors, would spur the US business activity, employment and put sustainable upward pressure on the US salaries and wages. By 2020, Trump says, his economic planning will push annualised GDP growth above the 3 percent threshold, and this economic prosperity will last for seven more years.

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The IMF staff, however, are looking at the existing situation, where this stimulus package is not yet in existence, and, given the current circumstances, Trump’s numbers look unrealistic. It is impossible, however, to comprehensively calculate the real effect of the Trump-proposed measures at this point, the Fund admitted, but any such assessments no the IMF’s part are quite cautious.

Under an “ideal constellation of pro-growth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialize,” the IMF said.

The IMF also said the US growth, if nothing changes (i.e. Trump will not enact his stimulus), will drop to 1.9 percent in 2019, and to 1.8 percent per year in 2020. The US are currently in the third-longest period of economic growth since 1850, given the full employment situation, but this hardly makes things any better, as disposable incomes are low, as is purchasing power, whilst the burden of household indebtedness is stunning. Jobs don’t help any longer.

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What the IMF suggests within the current framework of the US economic model – that is, until the Trump administration finally starts with their reform – is for the Federal Reserve to allow the inflation go above the targeted 2 percent and cut rates back to zero. The IMF also suggests increased petrol taxes and greenhouse emissions, a new consumption tax on the federal level and keeping Obamacare in place.

Herein lies the trouble, however, as all these IMF-proposed measures would increase the pressure on household budgets, already crumbling under the weight of high taxation, rising prices, high indebtedness, and low earnings. Besides, loose monetary policies would make a fiscal stimulus impossible and fuel asset bubbles, bringing a recession closer.

The IMF, therefore, appears to be increasingly bankrupt, both morally, and in terms of applicable economic ideas, but the Trump administration had better hurry up indeed delivering on their higher growth promises, as the risks of a recession hitting sometime between 2018-2020 are currently heightened.

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