IMF continues warning on US deficit By Shihoko Goto

The I.M.F. forcefully argues that the United States will need to adjust taxes and spending to bring its finances under control; the recovery alone won't do it. The fund's report warns that America's profligacy and its voracious appetite for credit will drive up interest rates around the world, threatening the global economic recovery and American productivity growth.

The U.S. budget deficit is burgeoning from rising defense and security spending, even as tax cuts are lowering government revenue, amid increasing demands on the budget from the retiring baby boom generation, the International Monetary Fund cautioned once again Wednesday....

The IMF warned that the large fiscal deficits will likely continue over the next decade as the administration keeps on cutting taxes on the one hand, while increasing defense and social spending on the other.

...the pace in which the deficit was growing as well as its sheer size [make] the current account deficit a significant liability to U.S. economic prospects.

At the same time, the IMF warned that the evaporation of fiscal surpluses accumulated over the 1990s "has left the budget less well-prepared to cope with the retirement of the baby boom generation, which will begin later this decade and place massive pressure on the social security and Medicare systems."

"Without the cushion provided by earlier surpluses, there is less time to address these programs' underlying insolvency to address these programs' underlying insolvency before government deficits and debt begin to increase unsustainably, making more urgent the need for meaningful reform," the IMF added.

As such, the international agency argued that the United States should focus its economic policy on restoring a budget balance, and quickly at that. While the IMF recognized the need for more military and security spending in light of the terrorist attacks and new global risks that need to be addressed, it nonetheless stressed the need for more disciplined spending by the government. It also called for better, and broader, ways of increasing the tax base, for example by reducing corporate and personal income tax preferences including corporate tax shelters and mortgage interest deductibility. It also reported that energy taxes "which are comparatively light in the United States", could be a good way of increasing government income.

While economists may argue on whether the IMF's assessment of the state of the U.S. economy and its suggestions for dealing with the ballooning deficits, it is unlikely that U.S. policymakers will take much, if any, of the IMF's warnings and suggestions to heart. For one, neither the Republican nor Democratic administration has had a track record of not taking much notice of what the IMF suggests about directing the U.S. economy.

...given that the IMF is prescribing such measures such as eliminating corporate tax shelters and introducing bigger energy taxes as the nation gears up for a presidential election, such unpopular policies suggested by an international organization are highly unlikely to gain much support among U.S. policymakers.

And as William H. Gross says,

We are trying to do too much, borrow too much, spend too much, and sooner or later we will have to suffer the consequences. We are a country in the beginning stages of what can best be described as hegemonic decay.

I'm pretty disgusted with Bush's spending. But the Democrats don't inspire much confidence, either.