The International Monetary Fund warned that the economic boost from last year’s tax cuts in the U.S. will fade in 2019 and 2020, and the U.S. economy will then slow considerably.
The IMF’s forecasts, released Thursday in Washington as part of its annual review of the U.S. economy, provide a sharp contrast to the economic outlook of the White House, which sees growth accelerating to a sustained 3% annual growth rate within five years. The IMF, by contrast, sees the U.S. growing at about half that pace once the tax cuts’ impact fades.
The IMF shares the administration’s view that the tax cuts made largely beneficial changes to the U.S. economy, especially by reducing tax code complexity, lowering marginal tax rates, and creating incentives for investment. They share a forecast of a near-term economic boost.
Where the IMF’s forecast differs is over the effects of the massive fiscal deficits that the Treasury is poised to incur in coming years, as revenue drops while spending also increases.
The combination of massive deficits and very low unemployment is “quite rare in the U.S. context and has not been seen since the Johnson administration,” the IMF said. While it will boost the economy this year and next, “it also increases the range and size of future risks, both for the U.S. and for the global economy.”
The growth will drop as low as 1.4% in 2023, the IMF said, a more pessimistic outlook than that of the Federal Reserve, which released forecasts Wednesday calling for 1.8% growth in the longer-run, and the Congressional Budget Office, which foresees 1.6% growth by 2023.
In each case, the forecasts aren’t an estimate of exactly what the economy will look like so many years out; rather they are estimates of the economy’s underlying potential. In recent decades, such forecasts have often missed the mark, generally by being too optimistic.
IMF Managing Director
told reporters that she had discussed the forecast with U.S. Treasury Secretary
and “he was clear that he regards our medium-term outlook as too pessimistic,” she said.
“Frankly, I hope he is right and we are wrong. That would be good for both the U.S. and the world economy,” she said.
The U.S. public debt-to-GDP ratio is forecast to rise from below 80% to above 90% over the next decade, with fiscal deficits of 4% to 5% of gross domestic product for the foreseeable future. A large and sustained fiscal stimulus, the IMF said, is likely to cause the U.S. trade deficit to widen and surpluses of major U.S. trading partners to grow.
The IMF’s review also criticized U.S. trade policies, which it said are “likely to move the globe further away from an open, fair and rules-based trade system, with adverse effects for both the U.S. economy and trading partners.”
The Trump administration and IMF officials have clashed before over their forecasts. Last year, the IMF had initially been optimistic about U.S. growth, but lowered its outlook due to questions about whether the White House and Congress could agree to major policy changes. Treasury and Office of Management and Budget officials criticized the Fund for its pessimism about policy. While large tax cuts ultimately passed—and the IMF raised its near-term forecasts back up—an initiative to repeal President
health care law narrowly failed, and efforts to raise infrastructure investment never got off the ground.
The IMF also repeatedly criticized the Obama administration for not tackling tax code complexity and doing too little to boost U.S. productivity growth and labor force participation.
Each year, the IMF conducts a formal review of the economic policies of all its 189 members countries. It doesn’t always go soft on the U.S., on the basis that its recommendations on fiscal and monetary policy are more credible to other countries if they also challenge Washington.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com