IMF, CBO: Deficits, Entitlement Spending Slowing Economic Recovery

Published August 5, 2017

The International Monetary Fund (IMF), an organization promoting global financial cooperation, predicts U.S. economic growth will be sluggish for the rest of 2017 and 2018, a forecast echoed by an official U.S. government forecast.

IMF analysts lowered expectations in a July 23 report, citing “uncertainty about the timing and nature of U.S. fiscal policy changes.”

IMF predicts the U.S. annual gross domestic product will grow by 2.1 percent by the end of 2017, downgrading from the April report’s predicted 2.3 percent 2017 growth rate.

IMF’s lowered expectations track with a June 29 Congressional Budget Office (CBO) report updating the nation’s economic outlook for the next 10 years.

CBO—a nonpartisan, independent government agency responsible for providing economic and budgetary analyses—predicted U.S. GDP growth will be “slightly above 2.0 percent through 2018 and averaging somewhat below that rate for the rest of the period through 2027,” settling at about 1.9 percent over the next decade.

The CBO report says the “pattern of generally rising [government budget] deficits over the coming decade is similar to that reported in CBO’s previous projections,” but actual cumulative deficits and interest debt payments have exceeded predictions.

The Cost of Spending

Dwight Lee, a senior fellow at the O’Neil Center in the Cox School of Business at Southern Methodist University, says excessive government spending is constricting economic growth.

“The cost of having the government spend more money or borrow more money is the foregone value that money would generate if left in the private economy,” Lee said. “It really doesn’t make much difference what the debt is or how much they’re borrowing .It makes some difference, but it’s how much they’re spending that is really important.”

Ignoring the deficit will only make things worse in the future, Lee says.

“We’re approaching, if we haven’t already passed, 100 percent of the expected GDP—this is how much the federal government is in debt,” Lee said. “When you get to 100 percent, you’ve got a problem. It’s not necessarily insurmountable, but it gets nastier and nastier in terms of how you’re going to pay it off.”

‘Relatively Simple Things’

Richard Cebula, a professor of finance at Jacksonville University, says growing the U.S. economy is the only sure way to solve the nation’s government debt problem.

“Relatively simple things need to be done,” Cebula said. “I would include among them, perhaps at the very top of the list, cutting the corporate tax rate in the United States, which is ludicrous. I think we also could focus a great deal toward attracting businesses to the United States, keeping business in the United States.”

Cebula says President Donald Trump’s tax reform proposal, released in May, would help boost economic growth.

“There are three new tax rates in the Trump budget: 15, 25, and 35 percent,” Cebula said. “I definitely believe the 15 and 25 [percent rates] certainly should be undertaken. I think if we did at least the first two tax cuts, that would have a number of benefits. Number one, [it would] raise disposable income for the middle class and for lower-income people, increase their purchases of goods and services, [and create] more jobs. In stimulating more jobs and more production, it could start to generate tax revenues to replace the tax revenues lost in the tax cuts.”