IMF Urges US to Fight Deficit by Raising Taxes, Reforming Entitlements

IMF Managing Director Kristalina Georgieva participates in a town hall discussion with civil society organizations at IMF headquarters in Washington on Oct. 10, 2022. (Drew Angerer/Getty Images)

International Monetary Fund (IMF) Managing Director Kristalina Georgieva urged U.S. policymakers to raise tax revenue and cut spending now rather than wait until the next economic crisis forces them to take action against the widening national deficit.

“Now, when there is a strong economy, it is the time to arrest and reverse this trend,” the IMF chief told reporters at a press conference in Washington, D.C. on June 27.

She said the government should look for ways to strengthen its fiscal position in the medium term, such as raising tax revenue, addressing structural imbalances, and reforming entitlement programs, such as social security and unemployment benefits, that account for almost half of the federal budget.

She said some legislation enacted under both the Trump and Biden administrations would have a “lasting positive impact in reshaping the US economy,” but such legislation needs to be complemented with “actions to put public debt to GDP on a decisive downward path.”

The warnings come after the Congressional Budget Office (CBO) predicted earlier this month that the deficit was likely to hit $1.9 trillion this year.

Policymakers Must Increase Income Taxes

In a report published on the same day as Ms. Georgieva’s press conference, the IMF stressed that the general government fiscal deficit and debt are—as a share of GDP—both projected to remain well above pre-pandemic forecasts over the medium term and urged policymakers to address the issue before its too late.

“Such high deficits and debt create a growing risk to the U.S. and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations,” the organization said.

The IMF report said policymakers need to “go beyond finding efficiencies in discretionary, non-defense federal spending,” and consider raising indirect taxes, progressively increasing income taxes, including for people earning less than US$400,000 per year, and eliminating a range of tax expenditures, along with addressing entitlement programs.

“Putting these measures in place will necessitate taking difficult political decisions over the course of multiple years,” the organization said.

Some of the fiscal savings from those cost-cutting efforts could then be used to increase spending on programs to alleviate poverty, among other things, the IMF said.

‘No Signs’ of US Investment Interest Waning

The IMF also lowered its 2024 U.S. GDP growth forecast to 2.6 percent from the 2.7 percent forecast published in its Economic Outlook in April.

Elsewhere, Ms. Georgieva said the IMF projects the personal consumption expenditures price index (PCE) —the Fed’s preferred measure of inflation— will end the year at around 2.5 percent, with inflation returning to the Federal Reserve’s 2 percent target by mid-2025; much sooner than the central bank’s own forecast of 2026.

She noted, however, that the organization recognizes “important upside risks to this path.”

“Given those risks, we agreed that the Fed should keep policy rates at current level until at least late 2024,” she told reporters.

Currently, the central bank’s rate is within the range of 5.25 percent to 5.50 percent, where it has been since July 2023.

Asked at the press conference if the United States would struggle to service its debt if other countries and investors began to avoid treasuries, the IMF chief noted the U.S. economy had rebounded massively since the COVID-19 pandemic, with more money flowing into the US from foreign investors.

“We see no signs of the interest in investing in the U.S. economy to weaken,” she said, adding that debt servicing costs remain “quite manageable.”