IMF: Boost from US tax cuts short-term

Report warns of adverse consequences from a number of Trump administration policies

The International Monetary Fund said on Thursday that tax cuts would help fuel the US 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 US 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 US 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 US 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. “We believe that 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 nearterm by driving up US domestic demand and making the dollar stronger.

A stronger dollar makes imports cheaper for US consumers while making US exports more expensive on overseas markets.

Lagarde 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 US and global financial markets.

The IMF projects US growth will hit 2.9% this year and 2.7% next year. Both are significant increases from last year’s 2.3% 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% in 2023.

This forecast would be just half of the 3% 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 aluminium 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.

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

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

“This big boost in the US government deficit is quite rare,’’ the IMF said. “It has not been seen in the United States since President Lyndon Johnson in the late 1960s boosted spending on the Vietnam War.’’

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

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