Mixed messages from the IMF, but bottom line is clear

May 20, 2010

In December 2008, International Monetary Fund (IMF) officials were directly questioned about whether fiscal stimuli could be problematic since debt levels were so high. They responded, essentially, by saying that desperate times call for desperate measures. Economic counselor Olivier Blanchard said:

In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different. If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past…

Less than 18 months later, the IMF is advising countries to change course.  As The Hill reports, “The IMF predicts that the United States [should] reduce its structural deficit by the equivalent of 12 percent of GDP… Greece, in the midst of a financial crisis, needs to reduce its structural deficit by just 9 percent of GDP, according to the IMF’s analysis.”  As we’ve said, how ironic that the very organization that was urging stimulus spending is now calling on the same countries to reduce deficits.

The IMF’s change in position doesn’t take anything away from its findings.  Americans have known for some time that the federal government is headed toward financial disaster, but the numbers the IMF provides are quite simply astonishing: within five years the U.S. debt will exceed 100 percent of GDP.

It’s important to note that the IMF report uses a broader measure for calculating debt than either the Congressional Budget Office or Office of Management and Budget. These two U.S. institutions leave out the long-term aspects of the U.S. spending burden, including health care reform. As the IMF explained in a March 2010 paper (emphasis added):

The CBO additionally produces biannual ‘baseline’ projections of the Federal budget under the assumed continuation of current laws and policies (i.e., not taking into account any proposals that are yet to be legislated). None of these projections are meant to provide an objective prediction of fiscal balances in the medium-term … The IMF’s fiscal projections usually take the President’s Budget Proposal as a starting point, making adjustments for differences in underlying economic assumptions and for the likelihood of the enactment of various policies…

It doesn’t matter whether you use the OMB, the CBO, or the IMF’s numbers. No matter how you slice it, this country needs to get its fiscal house in order. The IMF has a history of advocating for tax increases to close budget gaps, but we applaud its inclusion of spending cuts in its latest policy prescription.

Americans overwhelmingly want the government to cut spending – not increase taxes – to cure this problem.  Not only is that the most popular solution to this problem, it is also the most fiscally sound solution. The simple truth is that if the U.S. simply reduced spending per household to the average level it was in the 1990s (about $21,000 per household) we could balance the budget within a couple of years.

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