The International Monetary Fund’s second-in-command, Gita Gopinath, is urging the United States to address its growing fiscal burden by reining in spending and increasing taxes. She believes that the strong growth of the US economy provides ample room for fiscal consolidation. The IMF predicts that the US will record a fiscal deficit of 7.1% next year, which is significantly higher than the average of other advanced economies. Gopinath also praised the euro area’s fiscal reforms but stressed the importance of their implementation.
The IMF’s warnings come as economists and investors express concerns about the US economy due to years of fiscal profligacy by both Democrats and Republicans. The Congressional Budget Office expects debt to GDP to surpass its previous second world war-era high in 2029. The IMF believes that financing all spending through borrowing should be avoided, as it poses significant risks for the world economy. The IMF’s annual review of the US economy, the Article IV consultation, is scheduled to be released later this month.
While the Biden administration has struggled to reduce spending on health and social care, Gopinath implied that the IMF supports efforts to implement more progressive taxation targeting wealthy individuals. She suggested that capital gains and inheritance taxes could be more effectively enforced. Gopinath also highlighted the potential risks of generative AI, warning that its adoption could amplify the next economic downturn while also increasing productivity and growth. IMF research indicates that the technology could threaten a significant percentage of jobs across different types of economies.
Gopinath emphasized the need for countries to rethink how they support workers who are displaced by technological advancements. She suggested that countries consider increasing the generosity of unemployment insurance and implementing wage insurance to cover the gap between workers’ old and new salaries. The IMF believes that fundamental reforms are necessary in all advanced economies to address issues related to aging populations, pensions systems, and medical spending. Gopinath stressed the importance of addressing these challenges to ensure sustainable economic growth in the future.
Discussion about this post