August 6, 2003
The sluggish US economy appears set to gather speed but Washington must plan now to plug a record-sized budget deficit, the International Monetary Fund warned on Tuesday.
Gross domestic product (GDP) of the world's biggest economy was set to rise from 2.25 per cent in 2003 to 3.5 per cent next year, IMF staff said in an annual review. IMF directors welcomed signs of a US recovery, noting the support provided to the global economy.
'At the same time, however, they noted that the recovery has thus far been uneven and that downside risks remain,' the IMF executive board assessment said. Business investment, the stock market recovery and global economic developments were uncertain, they said. Other developments, especially in the red-hot housing market, might affect demand.
Looking ahead, long-term prospects were strong, helped by high growth in productivity, or output per hour worked, the Fund bosses said. 'They stressed, however, that for the economy's full potential to be realised, decisive action will need to be taken over the coming years to re-establish a strong US fiscal position,' the report said. 'In particular, they expressed concern that the worsening of the longer-term fiscal position, including as a result of the recent tax cuts, will make it even more difficult to cope with the aging of the baby-boom generation, and will eventually crowd out investment and erode US productivity growth.'
The White House last month forecast that the federal budget deficit would explode to a record US$455 billion (S$803 billion) in 2003, and then US$475 billion next year.
'Against this backdrop, (IMF) directors saw as priority for the US authorities to manage carefully the risks to the recovery, while establishing a credible approach for dealing with the longer-term fiscal problem,' the IMF statement said. 'They underscored that an effective response to these challenges will also help ensure that the US economy continues to play a key role in supporting sustainable global growth, and avoid placing undue pressure on global saving and interest rates.'
IMF chiefs pressed the United States to set up a 'credible fiscal framework' with a clear goal of returning the budget to balance over the next five to 10 years.
'Directors considered that the authorities face significant challenges in ensuring the long-term sustainability of the fiscal position,' the directors said. 'Although the deficit-to-GDP ratio is projected to narrow in coming years, the projections assume a substantial improvement in tax receipts and strict limits on discretionary outlays, both of which would mark a sharp turnaround from recent developments,' they said.
'The risks to the fiscal outlook appear especially worrisome given the significant actuarial deficit arising from the longer-term demographic pressures on the Social Security and Medicare (health care) systems.'
More Information on the International Monetary Fund
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