IMF says US needs to tackle debt despite robust growth

FILE PHOTO: International Monetary Fund logo is seen outside the headquarters building during the IMF/World Bank spring meeting in Washington, U.S., April 20, 2018. REUTERS/Yuri Gripas/File Photo

By David Lawder

WASHINGTON (Reuters) -The International Monetary Fund on Thursday called on the U.S. to raise taxes to curb rising debt levels while applauding "robust, dynamic" growth in the world's largest economy and progress towards bringing inflation under control.

The IMF said in a closing statement for its "Article IV" review of U.S. economic policies that 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 IMF's statement slightly revised down its 2024 U.S. GDP growth forecast to 2.6% from the 2.7% forecast in the global lender's World Economic Outlook in April.

The IMF forecasts U.S. growth in 2025 to dip to 1.9% -- unchanged from the April outlook -- and remaining above 2% through the end of the decade.

"The U.S. economy has proven itself to be robust, dynamic and adaptable to changing global conditions," the IMF said. "Activity and employment continue to expectations... and the disinflation process has been considerably less costly than many had feared."

The IMF said it expects U.S. inflation as measured by the Personal Consumption Expenditures Price Index to return to the Federal Reserve's 2% target by mid-2025, considerably sooner than the Fed's own forecast of returning to target in 2026.

IMF Managing Director Kristalina Georgieva told reporters that the IMF's forecast is more optimistic because of the current trajectory of inflation indicates a quicker return to target, partly because strong U.S. consumer spending driven by wealth built up during the COVID-19 pandemic is subsiding and the labor market is cooling.

But the IMF chided Washington for rising deficits that if continued would bring the U.S. debt-to-GDP ratio to a concerning level of 140% by the end of the decade. The IMF measure includes Social Security pension and Medicare healthcare obligations.

"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 Fund said.

For the second year in a row, the Fund prescribed that the U.S. increase income tax rates progressively, not only on the wealthiest Americans but also for households earning less than $400,000 a year -- a threshold that U.S. President Joe Biden has vowed not to cross in his re-election campaign pledges.

The Fund said the U.S. also should reform entitlement programs -- cuts that Biden nor Republican rival Donald Trump have vowed not to pursue -- and raise the threshold for eligibility for the Earned Income Tax Credit for workers without children.

Georgieva said the Fund was trying to provide to present a policy path for the U.S. "that in our view would serve the economy and its people well" as it would for any IMF member country.

With the U.S. economy strong, it was a "good time" for the U.S. to consolidate its fiscal position, she said adding: "It is in good times where you can do more to prepare yourself for risks in the future."

The U.S. Treasury sidestepped the advice over deficits in a statement issued after the IMF's assessment.

In her discussion with Georgieva, U.S. Treasury Secretary Janet Yellen "reiterated the importance of frank and thorough assessments of all IMF member economies through the annual surveillance process. They discussed the remarkable performance of the U.S. economy over the past few years, including economic growth and employment that continue to exceed expectations.

(Reporting by David Lawder; Editing by Paul Simao and Alistair Bell)