IMF Study Doubts Effect of Clinton’s Deficit Plan : Economy: Monetary group says that even full implementation of the President’s agenda would leave the U.S. at late 1980’s levels.
In a somber report on the outlook for the world economy, the International Monetary Fund said Monday that even full implementation of the Clinton Administration’s deficit-cutting agenda will leave the United States no better off than it was five years ago.
While the Administration’s program would help restrain future deficit spending, the annual budget shortfall would still account for 3% of the nation’s economy by the end of the century--about the same level as in the late 1980s, the IMF said.
The organization advocated “further measures” to reduce the deficit, recommending consideration of “a broadly based federal consumption tax.” The Administration has proposed a new tax on energy use as part of its economic plan, but has shied away from more sweeping revenue-raisers, such as a value-added tax.
The IMF recommendation is contained in its latest World Economic Outlook, a biannual report that predicts slower world economic growth than projected just six months ago and characterizes the recovery from global recession as “hesitant and uneven.”
The report estimates that the world economy will grow 2.25% this year and 3.5% in 1994, but notes that “the outlook remains unusually uncertain.” Both projections represent improvements over the 1.75% expansion registered last year, when the U.S. recovery was proceeding sluggishly and other leading industrial economies were mired in recession.
But the estimate of this year’s growth was revised downward from the 3% predicted six months ago. And it falls short of the 5% growth recorded in the years immediately following the recessions of 1974-’75 and 1981-’82. The report attributes the downward revision to “a protracted slowdown in Europe and an unexpectedly sharp weakening of activity in Japan.”
Despite its downbeat tenor, the report notes some bright spots. It contrasts “encouraging signs of stronger growth in North America” with deteriorating economic conditions in Japan and Europe, where it says recession would continue through much of this year.
The report was issued as the IMF began its annual spring meeting in Washington. The fund is made up of 176 member countries joined together to promote stability in the global monetary system and balanced economic growth. It traditionally has advocated deficit reduction as a cornerstone of governmental fiscal policy.
Although the United States appears to be leading the way out of the global recession that began unfolding in this country in 1990, the outlook is not altogether encouraging for this country and its major trading partners, the report said. Similarly, it notes that Russia and the other nations that made up the Soviet Union face enormous economic challenges in the years ahead.
On the other hand, the IMF said, many developing nations have not succumbed to the economic malaise spreading through the industrial world, reflecting economic stabilization and reform efforts that they have undertaken.
The developing countries as a whole can expect a robust growth rate of 5.1% over the next two years, the report said. Even so, it observed, the economic performance of much of the developing world remains unsatisfactory, and living standards are continuing to decline in many of the poorest countries.
As the IMF was making its report public, Treasury Secretary Lloyd Bentsen offered a troubling assessment of the nation’s continuing struggle to bring down an unemployment rate that has hovered for months around 7%.
Speaking to the Independent Bankers Assn. of America, Bentsen said that the U.S. growth rate so far this year is insufficient to bring the jobless rate down. The gross domestic product grew at an annual rate of 4.7% during the final quarter of 1992. But it is believed to have tailed off, perhaps to only half that rate, in the first quarter of 1993. Figures for the first three months of the year are to be made public on Thursday.
The IMF rated Clinton’s long-term plan for reducing the deficit and increasing public investments in the economy as “a considerable effort,” but one that would still fall short of its goals.
And if the Administration’s efforts to win congressional approval of its deficit-reduction measures are short-circuited, confidence in the economy could slacken and “the recent decline in long-term interest rates might be reversed,” the IMF said. This, in turn, could cause growth to falter in 1994.
The report was prepared by Michael Mussa, the IMF’s economic counselor and research director. At a news conference, Mussa said that the unemployment rate is likely to be approximately 5.5% in 1998, or about the same as in 1988, and the United States will continue to face significant economic problems.
“One could not go wrong reducing the budget deficit by another 2 percentage points of GDP,” he said.
In addition, Mussa said that the total amount of publicly held debt in the United States has grown from about 25% of gross domestic product in the late 1970s to a current level of 50%. He forecast that the debt level would grow to 60% by 1998, which, he said, “is not a sustainable fiscal situation.”
