## cr17239

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---

### Economic outlook and recent performance
- Growth:
  - The economy is expected to grow at 2.1 percent this year and next.
  - Baseline assumes unchanged policies; forecast neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget.
  - Growth is expected to rise modestly above 2 percent this year and next, driven by continued consumption growth and a cyclical rebound in private investment; growth is forecast to subsequently converge to the underlying potential growth rate.
- Labor market and inflation:
  - Job growth persistently strong; labor market indicators suggest the economy could be effectively at full employment.
  - Unemployment rate has been at, or below, 5 percent for the past 18 months.
  - Inflation has remained subdued and has weakened moderately in recent months; PCE inflation expected to slowly rise above 2 percent over the next 12–18 months before returning to the Federal Reserve’s medium-term target of 2 percent.
  - Wage indicators have shown a modest acceleration.
- Financial conditions:
  - Term premia are negative (around the same levels as 12 months ago); the dollar is moderately stronger; corporate bond spreads have compressed; equity markets high with low volatility pricing.
  - Money market fund reform led investors to rotate more than US$1 trillion out of prime funds into government bond funds.
  - Strains in the energy sector included defaults on around US$50 billion in energy debt in 2016.

### Two-sided near-term risks and medium-term challenges
- Fiscal path risks:
  - A medium-term path of fiscal consolidation (e.g., expenditure based consolidation proposed in the budget) would address medium-term fiscal imbalances but result in a growth rate below staff’s baseline.
  - On the upside, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus and raising near-term growth.
- Longer-term structural forces:
  - Technological change reshaping the labor market.
  - Low productivity growth.
  - Rising skills premia.
  - An aging population.
- If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.

### Executive Board assessment (summarized)
- Commended strengths:
  - Rebound in growth, improved consumer confidence, low unemployment, and steady job increases.
- Concerns:
  - Favorable near-term outlook clouded by medium-term challenges: rising public debt, potential growth below historical averages, declining labor force participation, and income growth that is not broadly shared.
- Monetary policy:
  - Economy close to full employment and inflation near 2 percent; policy rates should continue to rise gradually and remain data-dependent.
- Financial stability:
  - Financial system generally healthy; monitor rising vulnerabilities in corporate and household credit markets and implement remaining recommendations of the 2015 FSAP.
- Reform priorities highlighted:
  - More efficient tax system; more effective regulatory system; raising infrastructure spending; improving education and skills; strengthening healthcare coverage while containing costs; offering family-friendly benefits; maintaining free, fair, and mutually beneficial trade and investment; reforming immigration and welfare systems.

### Key policy recommendations (staff)
- Fiscal policy:
  - Calibrate fiscal policy to achieve a sustained but gradual reduction in the general government deficit, starting with the upcoming FY2018 budget, to ensure the public debt-GDP ratio declines through the medium-term.
  - Many Directors urged that tax reform lead to an increase in the revenue-to-GDP ratio and that the burden of fiscal adjustment not fall disproportionately on low- and middle-income households.
- Monetary policy:
  - Pace of future increases in the federal funds rate can be gradual, should be data dependent.
  - Recent addendum to policy normalization principles and plans provides clarity on reinvestment policy to help avoid undue volatility in fixed income markets.
- Tax reform:
  - U.S. personal and business tax system needs to be simpler and less distortionary, with lower tax rates and fewer exemptions.
  - Redesign should aim to raise labor force participation, mitigate income polarization, support low- and middle-income households, and be revenue enhancing over the medium term.
- Infrastructure:
  - A significant increase in public spending on maintenance, repair and new infrastructure projects is needed.
- Trade:
  - Greater trade integration, particularly in services, offers important gains with positive spillovers for the global economy.
- Financial regulation:
  - Preserve the current risk-based approach to regulation, supervision, and resolution while fine-tuning aspects of the system.
- Deregulation:
  - Simplification and streamlining of federal regulations and harmonizing rules across states could boost efficiency and stimulate job creation and growth; care is needed to avoid negative consequences for the environment, workplace safety, and protections for lower-income workers.
- Maintaining a productive and flexible workforce:
  - Improve educational opportunities and outcomes.
  - Offer childcare support for low- and middle-income families and introduce paid family leave.
  - Expand the earned income tax credit and increase the federal minimum wage.
  - Design better social assistance programs for the poor.
  - Protect recent gains in healthcare coverage and contain healthcare cost inflation.
  - Adopt a skills-based immigration system to enhance labor participation and productivity and ameliorate medium-term fiscal imbalances.

### Selected economic indicators and staff projections (exact figures)
- Real GDP growth (percentage change): 2016: 1.6; 2017: 2.1; 2018: 2.1; 2019: 1.9; 2020: 1.8; 2021: 1.7; 2022: 1.7
- Net exports (contribution to real GDP growth, percentage points): 2016: -0.1; 2017: -0.3; 2018: -0.2; 2019: -0.2; 2020: -0.2; 2021: -0.1; 2022: 0.0
- Total domestic demand: 2016: 1.7; 2017: 2.3; 2018: 2.3; 2019: 2.0; 2020: 1.8; 2021: 1.7; 2022: 1.7
- Private final consumption: 2016: 2.7; 2017: 2.2; 2018: 1.9; 2019: 2.0; 2020: 2.0; 2021: 1.9; 2022: 1.8
- Gross fixed domestic investment: 2016: 0.7; 2017: 4.3; 2018: 4.0; 2019: 2.9; 2020: 2.4; 2021: 2.6; 2022: 2.4
- Nominal GDP: 2016: 3.0; 2017: 3.9; 2018: 3.9; 2019: 4.1; 2020: 3.9; 2021: 3.8; 2022: 3.7
- Personal saving rate (% of disposable income): 2016: 5.7; 2017: 5.1; 2018: 5.3; 2019: 5.2; 2020: 4.9; 2021: 4.8; 2022: 4.7
- Private investment rate (% of GDP): 2016: 16.3; 2017: 16.7; 2018: 17.0; 2019: 17.0; 2020: 17.0; 2021: 17.0; 2022: 17.1
- Unemployment rate: 2016: 4.9; 2017: 4.3; 2018: 4.3; 2019: 4.4; 2020: 4.7; 2021: 4.9; 2022: 5.0
- Labor force participation rate: 2016: 62.8; 2017: 62.9; 2018: 62.9; 2019: 62.7; 2020: 62.4; 2021: 62.2; 2022: 61.9
- Potential GDP: 2016: 1.6; 2017: 1.8; 2018: 1.9; 2019: 1.8; 2020: 1.8; 2021: 1.8; 2022: 1.7
- Output gap (% of potential GDP): 2016: -0.4; 2017: -0.1; 2018: 0.1; 2019: 0.2; 2020: 0.2; 2021: 0.1; 2022: 0.0
- CPI inflation (q4/q4): 2016: 1.8; 2017: 2.1; 2018: 2.5; 2019: 2.6; 2020: 2.1; 2021: 2.2; 2022: 2.3
- Core CPI Inflation (q4/q4): 2016: 2.2; 2017: 2.0; 2018: 2.3; 2019: 2.5; 2020: 2.3; 2021: 2.3; 2022: 2.3
- PCE Inflation (q4/q4): 2016: 1.4; 2017: 1.7; 2018: 2.2; 2019: 2.3; 2020: 1.8; 2021: 1.9; 2022: 2.0
- Core PCE Inflation (q4/q4): 2016: 1.7; 2017: 1.7; 2018: 2.0; 2019: 2.2; 2020: 2.0; 2021: 2.0; 2022: 2.0
- Fed funds rate (percent): 2016: 0.4; 2017: 1.0; 2018: 1.6; 2019: 2.5; 2020: 2.9; 2021: 2.9; 2022: 2.9
- Ten-year government bond rate: 2016: 1.8; 2017: 2.4; 2018: 2.9; 2019: 3.5; 2020: 3.5; 2021: 3.5; 2022: 3.5
- Current account balance (% of GDP): 2016: -2.4; 2017: -2.5; 2018: -2.9; 2019: -3.0; 2020: -3.0; 2021: -2.9; 2022: -2.8
- Net international investment position (% of GDP): 2016: -44.8; 2017: -44.5; 2018: -45.7; 2019: -46.9; 2020: -48.2; 2021: -49.3; 2022: -50.3
- Gross national saving (% of GDP): 2016: 18.5; 2017: 17.7; 2018: 17.6; 2019: 17.4; 2020: 17.4; 2021: 17.6; 2022: 17.8
- General government saving (% of GDP): 2016: -1.8; 2017: -1.6; 2018: -1.3; 2019: -1.4; 2020: -1.4; 2021: -1.5; 2022: -1.6
- Gross domestic investment (% of GDP): 2016: 19.7; 2017: 20.1; 2018: 20.4; 2019: 20.4; 2020: 20.4; 2021: 20.5; 2022: 20.6

### Living standards, inequality, and labor dynamics
- Distributional outcomes:
  - More than half of the U.S. population has lower incomes today than they did in 2000 (inflation-adjusted terms).
  - One in seven Americans is currently living in poverty.
  - One half of those in the lowest quintile 20 years ago are still in the lowest quintile today.
  - Since 2000, around 3½ percent of the population has left the middle-income group (50–150 percent of the median income).
- Productivity and participation:
  - Little meaningful pick-up in productivity during the current expansion.
  - Labor force participation peaked in 2000 at 67 percent and has fallen to below 63 percent today.
  - Over one-third of prime-age men not in the labor force are now living in poverty.
  - Weak productivity and slower labor force growth account for three-quarters of the decline in potential growth since 2000.
- Declining labor share:
  - Since the early 2000s, the labor share of income has fallen by 3.5 percent; 90 percent of the aggregate decline driven by within-industry/state declines.
  - Technological change linked to routinization of tasks is the bulk driver since 2000, followed by trade globalization; institutional changes (e.g., unionization) also contributed.

### Macroeconomic risk scenarios and quantified impacts
- Weaker global growth:
  - A 1-percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage points of U.S. GDP after two years.
- Lower energy prices:
  - Current account deficit would widen by around 1 percent of GDP.
- A 10 percent dollar appreciation:
  - Estimated to reduce GDP by around 0.5 percentage points in the first year and 0.8 percentage points in the second year.
- Cyber-attacks on FMIs or key institutions:
  - Classified Low likelihood / High impact; could cause systemic risk, service disruption, and loss of confidence.

### Infrastructure, trade, deregulation, and workforce policies
- Infrastructure:
  - Based on American Society of Civil Engineers estimates, a permanent increase in federal, state, and local infrastructure spending of at least 0.5 percent of GDP per year is needed.
  - Administration targeting US$1 trillion in infrastructure investment anchored by a US$200 billion federal appropriation.
- Trade policy:
  - Administration withdrew from the Trans-Pacific Partnership and notified Congress of intent to renegotiate NAFTA; keeps emphasis on remaining open while avoiding new import restrictions.
- Deregulation:
  - Principle described: "For every new regulation that is introduced, two will be eliminated and the net cost of all new regulations will be zero."
  - Caution advised to avoid negative consequences for environment, workplace safety, and protections for lower-income workers.
- Education, family benefits, and social assistance:
  - K-12: prioritize early childhood education, universal pre-K, STEM, and reduce funding disparities across districts.
  - Tertiary: focus on college preparation and retention; consider income contingent repayment loans and increased needs-based grants.
  - Family support: propose six weeks of paid parental leave; address childcare constraints; reassess cliffs in benefits to smooth phase-out for near-poor.
- Immigration:
  - Labor force growth projected to slow to less than ½ percent annually in the coming decade; a comprehensive, skills-based immigration reform could add around 0.6 million new immigrants entering the labor force each year.

### Fiscal outlook, public debt sustainability, and stress tests
- Medium-term fiscal target:
  - Aim for a medium-term general government primary surplus of about ¾ percent of GDP (equivalent federal government surplus target: about 1 percent of GDP).
  - Recommended plan: raise the federal primary surplus by 2½ percent of GDP over the next several years.
- Public debt projections (selected baseline figures):
  - Federal debt held by the public (% of GDP): 2015: 73.3; 2016: 77.0; 2017: 77.3; 2018: 77.6; 2019: 77.8; 2020: 78.3; 2021: 79.2; 2022: 80.7; 2026: 86.9
  - General government gross debt (% of GDP): 2015: 105.7; 2016: 107.4; 2017: 108.5; 2018: 108.8; 2019: 109.1; 2020: 109.5; 2021: 110.2; 2022: 111.2; 2026: 113.4
  - Public gross financing needs (percent of GDP): 2006–2014: 17.3; 2015: 13.8; 2016: 17.2; 2017: 24.1; 2018: 20.2; 2019: 19.4; 2026: 21.9
- Stress-test sensitivities:
  - A 200 basis point increase in the sovereign risk premium would mean a debt ratio about 10 percentage points above the baseline (public debt in 2026 around 125 percent of GDP).
  - If real GDP growth is one standard deviation below the baseline, public debt would increase by about 10 percentage points above the baseline.
  - A combined macro-fiscal shock could raise the public debt ratio to as high as 140 percent of GDP by 2026.
- Public DSA baseline projections (selected):
  - Nominal gross public debt (% of GDP): 2016: 107.4; 2017: 108.5; 2018: 109.0; 2019: 109.2; 2020: 109.4; 2026: 113.4
  - Effective interest rate projected to rise to about 4.3 percent by 2026.

### Financial stability, FSAP recommendations, and market infrastructure
- Financial stability: system broadly healthy but rising vulnerabilities in corporate and household credit, high equity valuations, and pockets of underwriting deterioration.
- FSAP recommendations — implementation status (selected):
  - Provide explicit financial stability mandate to all FSOC member agencies: Not implemented.
  - Publish macroprudential toolkit and prioritize development (including CCyB): Partially implemented.
  - Expedite heightened prudential standards for designated non-bank SIFIs: Partially implemented.
  - Improve data collection and inter-agency data sharing: Partially implemented.
  - Triparty repo reforms and related measures: Implemented.
  - Financial market infrastructure resilience and CCP actions: Implemented.
- Market-based finance:
  - SEC adopted October 2016 rules requiring open-end funds to have liquidity risk management programs; rules permit swing pricing under certain circumstances.
  - IMF staff recommended floating NAVs for MMMFs; SEC rules require floating NAVs for institutional prime MMMFs but allow retail and government MMMFs to continue amortized cost constant NAVs with new tools.
- Cyber resilience:
  - U.S. authorities contributed to CPMI-IOSCO’s "Guidance on cyber resilience for financial market infrastructures" (June 2016).
  - Recommended further actions include systematic cyber data collection, forward-looking scenario analysis and public-private partnerships.

### Key diagnostic and strategic priorities (staff appraisal highlights)
- Diagnosis:
  - U.S. in its third longest expansion since 1850; Real GDP is now 12 percent higher than its pre-recession peak.
  - Despite strengths, secular shifts (technology, low productivity, rising skills premia, aging) have left growth too low and too unequal relative to historical performance.
- Strategic package effects:
  - Comprehensive reform package across tax, regulatory, infrastructure, education/skills, healthcare, family benefits, trade, immigration, welfare could raise productivity, labor supply, and investment, and improve living standards.
  - Such a plan requires changes in fiscal spending and revenue priorities and should be subsumed under a gradual but steady fiscal consolidation path given elevated public debt and deficit levels and spending pressures from aging and rising interest rates.
- Policy sequencing:
  - With the economy at full employment, gradually remove both fiscal and monetary support and refocus efforts on expanding potential growth, raising competitiveness, and strengthening the supply side.
  - Recommended fiscal plan: raise the federal primary surplus by 2½ percent of GDP over the next several years (to around 1 percent of GDP federal primary surplus or a general government primary surplus of around ¾ percent of GDP), beginning in 2018.

*International Monetary Fund, UNITED STATES STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (content unit: cr17239).*

### 4.4 percent and job growth continues to be strong. The economy has gone through a temporary

### 4.4 percent and job growth continues to be strong. The economy has gone through a temporary

### Economic outlook and recent performance
- The economy is expected to grow at 2.1 percent this year and next, modestly above potential, supported by solid consumption growth and a rebound in investment.
- The economy has gone through a temporary growth dip in the early part of this year but momentum has picked up.
- Labor market indicators suggest that the economy could be effectively at full employment.
- Inflation has remained subdued and has weakened moderately in recent months.
- Wage indicators have shown a modest acceleration.
- Over the next 12–18 months personal consumer expenditure (PCE) inflation is expected to slowly rise above 2 percent, before returning to the Federal Reserve’s medium-term target of 2 percent.

### Two-sided near-term risks and medium-term challenges
- Fiscal path risks:
  - A medium-term path of fiscal consolidation, such as the expenditure based consolidation proposed in the budget, would address medium-term fiscal imbalances but result in a growth rate that is below staff’s baseline.
  - On the upside, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus to the economy and raising near-term growth.
- Longer-term structural forces that may weigh on prospects:
  - Technological change reshaping the labor market.
  - Low productivity growth.
  - Rising skills premia.
  - An aging population.
- If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.

### Executive Board assessment (summarized)
- Directors commended strong performance including a rebound in growth, improved consumer confidence, low unemployment, and steady job increases.
- They noted the favorable near-term outlook is clouded by medium-term challenges: rising public debt, potential growth below historical averages, declining labor force participation, and income growth that is not broadly shared.
- Directors welcomed authorities’ goal to raise productivity and competitiveness and underscored importance of clarity regarding policy plans.
- Monetary policy: Directors agreed the economy is close to full employment and inflation is near 2 percent; policy rates should continue to rise gradually and remain data-dependent.
- Financial stability: The financial system is generally healthy; Directors urged monitoring rising vulnerabilities in corporate and household credit markets and implementation of remaining recommendations of the 2015 Financial Sector Assessment Program.
- Reform priorities highlighted: more efficient tax system; more effective regulatory system; raising infrastructure spending; improving education and skills; strengthening healthcare coverage while containing costs; offering family-friendly benefits; maintaining free, fair, and mutually beneficial trade and investment; and reforming immigration and welfare systems.

### Key policy recommendations (staff)
- Fiscal policy:
  - Fiscal policy should be calibrated to achieve a sustained but gradual reduction in the general government deficit, starting with the upcoming FY2018 budget, to ensure the public debt-GDP ratio declines through the medium-term.
  - Many Directors urged that tax reform lead to an increase in the revenue-to-GDP ratio and that the burden of fiscal adjustment not fall disproportionately on low- and middle-income households.
- Monetary policy:
  - The pace of future increases in the federal funds rate can be gradual, should be data dependent.
  - The recent addendum to the policy normalization principles and plans provides clarity on reinvestment policy to help avoid undue volatility in fixed income markets.
- Tax reform:
  - The U.S. personal and business tax system needs to be simpler and less distortionary, with lower tax rates and fewer exemptions.
  - Redesign should aim to raise labor force participation, mitigate income polarization, support low- and middle-income households, and be revenue enhancing over the medium term given unfavorable debt dynamics.
- Infrastructure:
  - A significant increase in public spending on maintenance, repair and new infrastructure projects is needed.
- Trade:
  - Greater trade integration, particularly in services, offers important gains with positive spillovers for the global economy.
- Financial regulation:
  - Preserve the current risk-based approach to regulation, supervision, and resolution while fine-tuning aspects of the system.
- Deregulation:
  - Simplification and streamlining of federal regulations and harmonizing rules across states could boost efficiency and stimulate job creation and growth; care is needed to avoid negative consequences for the environment, workplace safety, and protections for lower-income workers.
- Maintaining a productive and flexible workforce:
  - Improve educational opportunities and outcomes.
  - Offer childcare support for low- and middle-income families and introduce paid family leave.
  - Expand the earned income tax credit and increase the federal minimum wage.
  - Design better social assistance programs for the poor.
  - Protect recent gains in healthcare coverage and contain healthcare cost inflation.
  - Adopt a skills-based immigration system to enhance labor participation and productivity and ameliorate medium-term fiscal imbalances.

### Selected economic indicators and staff projections (exact figures)
- Real GDP growth (percentage change):
  - 2016: 1.6
  - 2017: 2.1
  - 2018: 2.1
  - 2019: 1.9
  - 2020: 1.8
  - 2021: 1.7
  - 2022: 1.7
- Net exports (contribution to real GDP growth, percentage points):
  - 2016: -0.1
  - 2017: -0.3
  - 2018: -0.2
  - 2019: -0.2
  - 2020: -0.2
  - 2021: -0.1
  - 2022: 0.0
- Total domestic demand:
  - 2016: 1.7
  - 2017: 2.3
  - 2018: 2.3
  - 2019: 2.0
  - 2020: 1.8
  - 2021: 1.7
  - 2022: 1.7
- Private final consumption:
  - 2016: 2.7
  - 2017: 2.2
  - 2018: 1.9
  - 2019: 2.0
  - 2020: 2.0
  - 2021: 1.9
  - 2022: 1.8
- Gross fixed domestic investment:
  - 2016: 0.7
  - 2017: 4.3
  - 2018: 4.0
  - 2019: 2.9
  - 2020: 2.4
  - 2021: 2.6
  - 2022: 2.4
- Nominal GDP:
  - 2016: 3.0
  - 2017: 3.9
  - 2018: 3.9
  - 2019: 4.1
  - 2020: 3.9
  - 2021: 3.8
  - 2022: 3.7
- Personal saving rate (% of disposable income):
  - 2016: 5.7
  - 2017: 5.1
  - 2018: 5.3
  - 2019: 5.2
  - 2020: 4.9
  - 2021: 4.8
  - 2022: 4.7
- Private investment rate (% of GDP):
  - 2016: 16.3
  - 2017: 16.7
  - 2018: 17.0
  - 2019: 17.0
  - 2020: 17.0
  - 2021: 17.0
  - 2022: 17.1
- Unemployment rate:
  - 2016: 4.9
  - 2017: 4.3
  - 2018: 4.3
  - 2019: 4.4
  - 2020: 4.7
  - 2021: 4.9
  - 2022: 5.0
- Labor force participation rate:
  - 2016: 62.8
  - 2017: 62.9
  - 2018: 62.9
  - 2019: 62.7
  - 2020: 62.4
  - 2021: 62.2
  - 2022: 61.9
- Potential GDP:
  - 2016: 1.6
  - 2017: 1.8
  - 2018: 1.9
  - 2019: 1.8
  - 2020: 1.8
  - 2021: 1.8
  - 2022: 1.7
- Output gap (% of potential GDP):
  - 2016: -0.4
  - 2017: -0.1
  - 2018: 0.1
  - 2019: 0.2
  - 2020: 0.2
  - 2021: 0.1
  - 2022: 0.0
- CPI inflation (q4/q4):
  - 2016: 1.8
  - 2017: 2.1
  - 2018: 2.5
  - 2019: 2.6
  - 2020: 2.1
  - 2021: 2.2
  - 2022: 2.3
- Core CPI Inflation (q4/q4):
  - 2016: 2.2
  - 2017: 2.0
  - 2018: 2.3
  - 2019: 2.5
  - 2020: 2.3
  - 2021: 2.3
  - 2022: 2.3
- PCE Inflation (q4/q4):
  - 2016: 1.4
  - 2017: 1.7
  - 2018: 2.2
  - 2019: 2.3
  - 2020: 1.8
  - 2021: 1.9
  - 2022: 2.0
- Core PCE Inflation (q4/q4):
  - 2016: 1.7
  - 2017: 1.7
  - 2018: 2.0
  - 2019: 2.2
  - 2020: 2.0
  - 2021: 2.0
  - 2022: 2.0
- Fed funds rate (percent):
  - 2016: 0.4
  - 2017: 1.0
  - 2018: 1.6
  - 2019: 2.5
  - 2020: 2.9
  - 2021: 2.9
  - 2022: 2.9
- Ten-year government bond rate:
  - 2016: 1.8
  - 2017: 2.4
  - 2018: 2.9
  - 2019: 3.5
  - 2020: 3.5
  - 2021: 3.5
  - 2022: 3.5
- Current account balance (% of GDP):
  - 2016: -2.4
  - 2017: -2.5
  - 2018: -2.9
  - 2019: -3.0
  - 2020: -3.0
  - 2021: -2.9
  - 2022: -2.8
- Net international investment position (% of GDP):
  - 2016: -44.8
  - 2017: -44.5
  - 2018: -45.7
  - 2019: -46.9
  - 2020: -48.2
  - 2021: -49.3
  - 2022: -50.3
- Gross national saving (% of GDP):
  - 2016: 18.5
  - 2017: 17.7
  - 2018: 17.6
  - 2019: 17.4
  - 2020: 17.4
  - 2021: 17.6
  - 2022: 17.8
- General government saving (% of GDP):
  - 2016: -1.8
  - 2017: -1.6
  - 2018: -1.3
  - 2019: -1.4
  - 2020: -1.4
  - 2021: -1.5
  - 2022: -1.6
- Gross domestic investment (% of GDP):
  - 2016: 19.7
  - 2017: 20.1
  - 2018: 20.4
  - 2019: 20.4
  - 2020: 20.4
  - 2021: 20.5
  - 2022: 20.6

### Key diagnostic and strategic priorities (staff appraisal highlights)
- Diagnosis:
  - U.S. is in its third longest expansion since 1850; job growth persistently strong; inflation subdued; economy effectively at full employment.
  - Despite strengths, the U.S. is confronting secular shifts (technology, low productivity growth, rising skills premia, aging) that have left growth too low and too unequal relative to historical performance.
  - Policy challenge: realign policies to raise productivity and labor force participation, reduce poverty and income polarization, and restore adaptability and dynamism.
- Strategic policy package effects:
  - A comprehensive reform package (tax, regulatory, infrastructure, education/skills, healthcare, family benefits, trade, immigration, welfare) could raise productivity, labor supply, and investment, and ultimately improve living standards.
  - Such a plan requires changes in fiscal spending and revenue priorities and should be subsumed under a gradual but steady fiscal consolidation path given elevated public debt and deficit levels and spending pressures from aging and rising interest rates.

*International Monetary Fund, UNITED STATES STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION*

### 1. Recent Developments __________________________________________________________________________ 6

### 1. Recent Developments

### An economy at full employment
- The U.S. expansion is the third longest since 1850; Real GDP is now 12 percent higher than its pre-recession peak.
- Job growth has been persistently strong; the unemployment rate has been at, or below, 5 percent for the past 18 months.
- Labor market indicators:
  - Tightening labor market is drawing detached workers back into the labor market and starting to put upward pressure on wages, particularly for those switching jobs.
  - Labor force participation has improved modestly.
  - Measures of capacity utilization have returned to pre-crisis levels.
- Staff assessment: sizable measurement uncertainties exist, but economic slack appears virtually exhausted; GDP is expected to rise above potential in 2017Q3.

### Macroeconomic outlook and baseline assumptions
- Baseline assumes unchanged policies; forecast neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget.
- Under the baseline:
  - Growth is expected to rise modestly above 2 percent this year and next, driven by continued consumption growth and a cyclical rebound in private investment.
  - Growth is forecast to subsequently converge to the underlying potential growth rate.
- Policy uncertainty implies larger-than-usual, two-sided near-term risks to growth.

### Financial conditions and vulnerabilities
- Financial conditions supportive of growth:
  - Term premia are negative (around the same levels as 12 months ago).
  - The dollar is moderately stronger.
  - Corporate bond spreads have compressed.
  - Equity markets have registered significant gains with a very low pricing of volatility.
  - Survey indicators suggest a relatively abundant supply of credit to households and corporates.
- Financial system broadly healthy, but rising vulnerabilities in some areas:
  - Corporate credit:
    - Leverage is rising in parts of the non-energy corporate sector.
    - Some evidence of steady erosion of underwriting standards in the corporate bond market.
    - Structural shifts in bricks-and-mortar retail are creating adjustment pressures with knock-on implications for parts of retail real estate.
  - Household credit:
    - Potential risks from rapid growth in auto lending (particularly to higher risk borrowers) and in student loans.
  - Equity markets:
    - Equity valuations remain high; the price-earnings ratio is well above its long-term average.
    - A significant equity price decline would feed through balance sheets and have significant wealth effects.
- Specific figures and developments:
  - Money market fund reform led investors to rotate more than US$1 trillion out of prime funds into government bond funds.
  - Strains in the energy sector included defaults on around US$50 billion in energy debt in 2016; deleveraging and reorganization ongoing.
  - Nonfinancial corporate leverage has risen slowly (see Figure 2 in source).
  - Forward-looking default probabilities are generally low with a significant fall in the energy sector.

### Inflation outlook
- Inflation is gradually heading toward the Federal Reserve’s medium-term objective.
- Recent sizable negative shocks to core inflation occurred over the past few months—linked to cell phone prices and prescription drugs—which may be transitory but give rise to downside risks.
- Survey expectations of medium-term inflation are reasonably well anchored but market-based measures of inflation expectations have drifted down.
- Under staff’s baseline, core inflation is expected to rise modestly above 2 percent in 2019 and subsequently approach the Fed’s medium-term target from above.
- Risks to the inflation outlook:
  - Previous upswings in core inflation have stalled; bottom-up estimates suggest it will be a challenge to break inflation out of its post-crisis range.
  - Changing labor market and technology dynamics may make the expected pick-up in nominal wages and prices elusive.
  - There is at best weak empirical evidence of nonlinearities in the Phillips curve.

### External position
- Current account deficit has narrowed from pre-crisis levels owing to higher private saving and lower investment; expected to remain close to 3 percent of GDP over the medium term.
- International investment position shows a growing net liability amounting to 43 percent of GDP.
- Real effective exchange rate (REER) developments:
  - REER has appreciated 4 percent over the past 12 months.
  - REER is up by around 20 percent since end-2013.
  - This leaves the U.S. dollar moderately overvalued, by around 10–20 percent.

### Authorities’ views and policy considerations
- Authorities see significant upside risks driven by planned policy changes; sustainably increasing growth to 3 percent is viewed as challenging but feasible.
- Policy mix views from authorities:
  - The right combination of tax reform, deregulation, and a fairer global trading system could encourage business investment, job creation, and lift labor market attachment.
  - Significant reduction in federal non-defense spending would help address high and rising public debt.
- Financial stability stance:
  - Valuations and market pricing of volatility are high/low respectively; term premium remains compressed.
  - Financial stability risks judged manageable given stronger regulation and supervision built in recent years.
  - Cyber risks constitute one of the largest and most pervasive risks; efforts to protect federal networks and critical infrastructure and to strengthen public-private partnerships are being increased.

### Cyber risks to financial stability (Box 1)
- Character of cyber risks:
  - Finance industry has seen by far the most cyber incidents with confirmed data losses; 2016 examples include DarkSeoul, Bangladesh Bank, Corkow malware.
  - Financial market infrastructure tends to have little redundancy and concentrate risk, enabling attacks to transmit quickly across large parts of the financial system.
  - Increased digitalization and network interconnectivity imply attacks likely to occur with greater frequency and sophistication.
- Challenges in assessing cyber risk:
  - Cyber risk exposures are common across firms and highly correlated under stress.
  - Rarity of large cyber events, unknown shock transmission patterns, lack of event data, complex risk aggregation, and long-term uncertainty hamper measurement, modeling, and pricing.
  - Cyber liability insurance popularity has grown but actuarial modeling techniques are underdeveloped; markets may have large gaps in coverage and concentrated exposures.
- Policy and supervisory actions noted:
  - U.S. oversight framework has increased supervisory intensity and enhanced regulatory requirements related to cyber vulnerabilities.
  - Regulators are developing and enforcing standards tiered by size and risk, enhancing information sharing processes, and undertaking thematic examinations of cybersecurity preparedness.
- Recommended further actions:
  - Reducing information asymmetries through systematic collection and sharing of cyber data, including on the costs of cyber events.
  - Undertaking forward-looking scenario analysis and simulations (“war gaming”) to improve contingency planning and systemic preparedness.
  - Pursuing public-private partnerships among industry, governments, and academia to improve systemic risk management.
  - Refining the regulatory architecture: complement high level principles with more specific firm-level guidance.

### Risk Assessment Matrix — selected entries
- Retreat from cross-border integration
  - Overall Level of Concern: High
  - Medium-term Likelihood of Realization: Medium
  - Expected Impact if Risk Materializes: Wide-ranging negative effects on trade, capital flows, growth, confidence, and global cooperation on financial regulation.
- Policy and geopolitical uncertainties
  - Overall Level of Concern: High
  - Medium-term Likelihood of Realization: Medium
  - Expected Impact if Risk Materializes: Risks to baseline expectations; potential to fuel global imbalances and FX and capital flow volatility; negative spillovers via migration changes.
- Significant further strengthening of the U.S. dollar and/or higher rates
  - Overall Level of Concern: High
  - Medium-term Likelihood of Realization: Medium
  - Expected Impact if Risk Materializes: A 10 percent dollar appreciation is estimated to reduce GDP by around 0.5 percentage points in the first year and 0.5-

*Source: IMF staff, “1. Recent Developments” (cr17239).*

### 0.8 percentage points in the second year.

### cr17239 - 0.8 percentage points in the second year.

### Macroeconomic risk scenarios and quantified impacts
- Weaker-than-expected global growth (significant slowdown in China and other large EMs)
  - Triggering events: distress in the corporate sector, disruptive dry-up of interbank markets, pressures on the Renminbi, turning credit cycle, disorderly deleveraging spilling over to other EMs and AEs.
  - Quantified impact: A 1-percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage points of U.S. GDP after two years.
  - If disruption feeds into global financial markets or risk aversion, the effect would be larger.
- Lower energy prices
  - Triggering events: production cuts agreed by OPEC members are not realized and/or other sources of supply increase production.
  - Quantified impact and considerations: With the level of U.S. oil investment already cut in half over the past 3 years, renewed price declines are unlikely to have strong effects on aggregate U.S. growth. However, solvency risk in the oil sector would rise. There could be offsetting positive effects on consumer demand from lower oil prices.
  - Current account: The current account deficit would also widen by around 1 percent of GDP.
- Cyber-attacks on financial market infrastructure or key financial institutions
  - Triggering events: successful cyber-attack on one or more critical FMIs or systemically important financial institutions.
  - Risk classification: Low likelihood / High impact.
  - Consequences: systemic risk in the U.S. and/or global financial system, shock to critical infrastructure causing delay/denial/disruption/breakdown or loss of services across many institutions, potential loss of confidence in functioning of the financial system.

### Living standards and the distributional challenge
- Core diagnosis
  - The U.S. economy is delivering better living standards for only the few; national election demonstrated broad dissatisfaction.
  - More than half of the U.S. population has lower incomes today than they did in 2000 (inflation-adjusted terms).
  - One in seven Americans is currently living in poverty.
- Poverty and mobility
  - One half of those that were in the lowest quintile of the income distribution 20 years ago are still in the lowest quintile today.
  - Children of poor households are more likely to have significantly lower earnings as adults.
- Income polarization and the middle class
  - Since 2000, around 3½ percent of the population has left the middle-income group (50–150 percent of the median income).
  - Post-crisis gains in real per capita GDP have accrued almost exclusively to higher income groups; “hollowing out” has increased the share of the population earning less than one-half of the median income.

### Productivity, labor force, and demographic dynamics
- Weak productivity as headwind
  - Throughout the current expansion, there has been little meaningful sign of a pick-up in productivity.
  - Candidate explanations: low business investment, declining dynamism in the labor market, lower churn in business formation and destruction, and an aging population.
- Labor force participation and demographics
  - Labor force participation peaked in 2000 at 67 percent and has fallen to below 63 percent today.
  - Aggregate decline masks a concerning decline in prime-age male labor force participation, especially acute for those without college education.
  - Over one-third of prime-age men that are not in the labor force are now living in poverty.
  - Demographics: dependency ratio (age 65+ as share of 16-64 y.o. population) is rising and will continue to compress productivity outturns.
- Contribution to slowing potential growth
  - Weak productivity and a slower growth of the labor force account for three-quarters of the decline in potential growth since 2000.

### State-level evidence on labor productivity (Box 2) — empirical findings
- Panel regression across states identifies correlates of productivity growth:
  - Capital investment: states with a higher initial capital stock per worker have higher productivity growth (robust across episodes). Encouraging increased investment is critical.
  - Taxation: the level of state income taxation (as a share of state-level GDP) is negatively correlated with productivity during the current expansion and in the 2000s.
  - Demographics: a rising dependency ratio puts downward pressure on output per worker.
  - Dynamism: no evidence that churn (creation/destruction of establishments or labor market churn) is correlated with productivity.
  - Manufacturing: state-level differences in the size of the manufacturing sector do not appear correlated with productivity outturns.
- Policy areas indicated by state-level regressions:
  - Reduction in distortions in the tax system and lowering of marginal rates.
  - Regulatory changes to incentivize private investment.
  - Infrastructure investment.
  - Skills-based immigration reform that improves the dependency ratio.

### Declining labor share and drivers (Box 3)
- Facts
  - Since the early 2000s, the labor share of income has fallen by 3.5 percent.
  - 90 percent of the aggregate decline has been driven by a fall in the labor share within industries and states (i.e., not compositional change).
- Drivers (from cross-state, industry-level analysis)
  - Largest declines in labor share were in industries that:
    - Had a high initial intensity of “routinizable” occupations;
    - Experienced steep declines in unionization;
    - Faced the greatest increase in competition from imports;
    - Had the highest intensity of foreign input usage.
  - Exposure to task offshoring or the intensity of labor market regulations appears not to have had a significant impact.
- Bottom line
  - Technological change linked to routinization of tasks is the bulk driver since 2000, followed by trade globalization; institutional changes (e.g., unionization) also contributed.

### State-level patterns of income polarization (Box 4)
- Since 2000, around 3½ percent of total households moved out of the middle-income group; most moved into the low-income group.
- Variation across states:
  - Kentucky: more than 7 percent of households moved from middle- to low-income ranks.
  - North Dakota: more than 10 percent of households moved from middle- to higher-income group (largely due to the oil boom).
  - Idaho and Oregon: very little change in income polarization during this period.
- Sectoral shifts
  - Most workers moving out of the middle-income group have lost jobs in manufacturing and construction.
  - Around 1 percent of those households moved into service sector jobs earning more than 150 percent of the median; 2½ percent moved into low skilled service jobs earning less than 50 percent of the median.
- Regression evidence
  - Bulk of middle-to-low income moves can be explained by structural shift in industrial composition (decline in manufacturing and rise of services), an increase in the share of (low income) immigrant households, and workforce aging.
  - Increases in education attainment have been a countervailing force.

### Policy recommendation: the right macroeconomic policy mix
- General guidance
  - With the economy at full employment, gradually remove both fiscal and monetary support and refocus efforts on expanding potential growth, raising competitiveness, and strengthening the supply side.
  - Expected benefits: lower the current account deficit and improve the net international investment position, reduce overvaluation of the U.S. dollar, and positive spillovers to other countries.
- A. A Sustained and Balanced Medium-Term Fiscal Consolidation
  - Fiscal imperative: demographic trends and rising interest rates will lead to a steady increase in fiscal deficits and public debt under unchanged policies.
  - Recommended plan: raise the federal primary surplus by 2½ percent of GDP over the next several years (to around 1 percent of GDP or a general government primary surplus of around ¾ percent of GDP).
  - Timing: the adjustment can be phased in gradually but ought to begin in 2018 to ensure that the federal debt-GDP ratio falls over the medium term.
- Assessment of the administration’s budget proposal
  - Under the authorities’ budget, the federal primary balance is forecast to go from a 1.9 percent of GDP deficit to a 2.1 percent of GDP surplus over the next 10 years.
  - Main components described:
    - Reduction in both non-defense spending and defense outlays as a share of GDP (non-defense reductions concentrated in downsizing line agencies and reductions in safety net programs including funding for Medicaid and food stamps, tightening eligibility for earned income and child tax credits and disability insurance).
    - Tax reform designed to improve efficiency, lower marginal rates, and broaden the base while leaving the federal revenue-GDP ratio broadly unchanged.
    - An extremely optimistic real GDP growth assumption, that rises to 3 percent by 2021 and remains at that level over the medium term.
- Fiscal outlook visualization (as described)
  - Government Debt (percent of GDP) series shown for 2016, 2019, 2022, 2025 with federal government (fiscal years) and general government trajectories.

*International Monetary Fund — UNITED STATES (Excerpt from cr17239 - 0.8 percentage points in the second year.)*

### 21.      Even with an ideal constellation of pro-growth policies, the potential growth

### 21.      Even with an ideal constellation of pro-growth policies, the potential growth

### Growth prospects and constraints
- The U.S. is effectively at full employment; policy changes must raise the U.S. potential growth path to achieve sustained higher growth.
- International experience and U.S. history suggest a sustained acceleration in annual growth of more than 1 percentage point is unlikely.
- Since the 1980s, only a few identified cases among advanced economies achieved such accelerations; these mostly occurred in the mid to late 1990s amid strong global demand and many were associated with recoveries from recessions.
- The comparable U.S. acceleration following the early 1980s recession occurred with favorable demographics, rising labor force participation, a significant expansion of the federal fiscal deficit, and an acceleration in trading partner growth—tailwinds unlikely to recur today.

### Fiscal space and recommended stance
- The U.S. has some fiscal space due to low financing costs and strong demand for high quality liquid assets and the U.S. dollar’s reserve currency status.
- With the economy close to full employment, an expansionary fiscal impulse now is unadvisable and would likely:
  - Steepen an already-unsustainable federal debt-GDP path (see Annex II).
  - Produce a more overvalued U.S. dollar.
  - Accelerate monetary policy normalization.
  - Increase global current account imbalances.
- Over a longer horizon, unaddressed fiscal costs from an aging demographic would cause the debt-GDP ratio to continue rising and could call into question federal creditworthiness.

### Recommended gradual fiscal consolidation (policy composition)
- The budget as framed implies significant cuts to discretionary spending and places a disproportionate adjustment burden on low- and middle-income households.
- Recommended alternative composition of adjustment:
  - A tax reform that simplifies the tax system, improves efficiency, supports low- and middle-income households and increases the federal revenue-GDP ratio.
  - More balanced expenditure restraint that strengthens safety net effectiveness and reprioritizes appropriations to increase spending on programs that encourage labor force participation, improve infrastructure, and raise productivity and human capital.
  - Social security reforms, including:
    - Raising the income ceiling for social security contributions.
    - Indexing benefits to chained CPI or PCE inflation.
    - Increasing the retirement age.
    - Instituting greater progressivity in the benefit structure.
    - These measures "could reduce the imbalances in the social security system by around 0.5 percent of GDP per year."
  - Policy action to contain healthcare cost inflation via technological solutions that increase efficiency, encourage greater cost sharing with beneficiaries, and shift incentives toward remunerating providers for health outcomes rather than per procedure.
  - Avoid political brinkmanship over appropriations and the debt ceiling; consideration could be given to replacing the debt ceiling with a clear, simple medium-term fiscal objective or automatically adjusting the debt ceiling to be consistent with broader budget agreements.
- Expected outcomes: lower public debt-GDP ratio over time with better distributional outcomes; support for low- and middle-income households and investments in human and physical capital would feed back into better growth and more broad-based improvements in living standards over the medium-term.

### Authorities’ views on fiscal plans
- The administration is committed to increasing defense, infrastructure and security spending in the upcoming fiscal year and lowering most other spending items, outside of social security and Medicare.
- There is scope to reduce or eliminate programs with limited effect on outcomes due to significant inefficiency and duplication in federal spending.
- Efforts were being made to devolve responsibilities and provide states greater flexibility (including Medicaid, social assistance programs, and infrastructure provision) to allow states to innovate and find more efficient solutions.
- The proposed reductions in federal spending are expected, in authorities’ view, to encourage a return to productive work and have positive implications for the income distribution.

### Monetary normalization: stance and sequencing
- With the Federal Reserve on track to achieve its dual mandate of price stability and maximum employment, policy rates should continue to rise; the pace can be gradual and data dependent.
- Given downside risks to inflation and asymmetries from the effective lower bound, the Federal Reserve should be ready to accept some modest, temporary overshooting of its inflation goal to allow inflation to approach the 2 percent medium-term target from above as insurance against disinflation risks.
- Under staff’s forecasts and presuming fiscal policy and other developments evolve accordingly, ensuring inflation rises only modestly above 2 percent will require:
  - An increase in the federal funds rate of a further 25 basis points in 2017 and 75 basis points in 2018.
  - Policy rates should level off at the neutral rate by end-2019 (judged to be in the 2.5–3 percent range).
- Market futures price a much flatter path for the federal funds rate in 2017–19 (measure does not represent the modal market forecast).

### Balance sheet normalization details and effects
- The Federal Reserve should unwind post-crisis increases in holdings of treasury and mortgage-backed securities, with plans well-telegraphed early to avoid triggering an unexpected steepening of the yield curve or rise in MBS spreads.
- Addendum specifics on reinvestment caps:
  - Initially, only maturing principal above US$6 billion per month for treasuries and US$4 billion per month for MBS would be reinvested.
  - These caps would be gradually raised to US$30 billion and US$20 billion per month, respectively, during the first year that reinvestments are being reduced.
  - The US$30 and US$20 billion caps would remain in place over the medium term allowing for a gradual decline in the balance sheet.
  - The FOMC would be prepared to resume reinvestment of principal payments if there were a material deterioration in the economic outlook that warrants a sizable reduction in the target for the federal funds rate.
- Implementation expectation: FOMC members expect the plan would begin to be implemented later this year.
- Projected balance sheet reductions under announced plan if normalization begins end-2017:
  - Balance sheet would decline by US$318 billion in 2018 and by US$409 billion in 2019.
  - Such a reduction could have a monetary policy impact equivalent to a 22 basis point increase in the federal funds rate over the next two years (based on Davig and Smith, 2017).
- Assessment:
  - The monetary policy effects of balance sheet roll-off are expected to be small and possibly overstated since market pricing already incorporates an expectation of balance sheet reduction.
  - Given small monetary effects, balance sheet normalization should proceed independently of changes in the federal funds rate and in inflation and employment outcomes, and decisions should be geared toward minimizing market volatility.
- Longer-run considerations:
  - As normalization proceeds, the FOMC could indicate the eventual monetary policy operating framework over a longer horizon.
  - Given long duration of MBS holdings, consideration could be given to selling or swapping MBS for treasuries so the long-run balance sheet is composed only of treasury securities.
  - Continued clear communication will help maintain the Fed’s track record of smoothly normalizing policy.

### Authorities’ views on monetary outlook
- Recent declines in inflation are viewed by authorities as likely transitory and idiosyncratic; inflation expected to remain somewhat below 2 percent in the near term but rise to the 2 percent objective over the medium term.
- Fed holdings of securities are expected to decline in a gradual and predictable manner and the federal funds rate would be the primary means for adjusting policy stance.
- A material deterioration in the economic outlook warranting a sizable reduction in the federal funds rate could be accompanied by resumption of reinvestment of principal payments.
- Under the baseline outlook, changes to the balance sheet are intended to operate quietly in the background with minimal effects on financial conditions; future reserves in the banking system expected to be appreciably below recent years but larger than before the financial crisis.
- Details about the longer-term operating framework will be decided and communicated in due course.

### Strengthening foundations for growth and resilience — overview
- The U.S. faces serious constraints on medium-term growth: weak productivity, falling labor force participation, increasing income polarization, an aging population, and high levels of poverty.
- Consequences cited:
  - Labor share of income is around 5 percent lower today than 15 years ago.
  - The middle class is smaller today than at any point in the last 30 years.
  - Outside the immediate aftermath of the financial crisis, the U.S. has the lowest potential growth rate since the 1940s.
- Addressing these secular trends requires action across tax, infrastructure, trade, regulation, education, healthcare, immigration, and support for low- and middle-income households, front-loaded as much as possible.

### Tax policy: objectives and staff recommendations
- Broad objectives of tax reform: simplify the system, scale back tax preferences, lower marginal rates, incentivize labor force participation, business investment, and innovation, mitigate income polarization, and support low- and middle-income households.
- Staff view: limited details on administration’s tax reform suggest it is likely to generate a fall in the revenue-GDP ratio over the medium-term and disproportionately benefit the wealthy.
- Staff recommendation: tax reform should be revenue enhancing over the medium-term to provide resources for growth-enhancing outlays and reduce public debt. Potential elements:
  - Business tax:
    - Move to a rent tax (cashflow tax or allowance for corporate capital tax) with a somewhat lower marginal rate to incentivize investment and lessen bias toward debt finance.
    - Combine with elimination of various corporate tax preferences.
    - Recognize sizable international spillovers (effects on international investment location and profit shifting).
  - Taxing offshore profits:
    - Transitioning to a territorial system merits consideration but should be combined with a minimum tax for profits earned in low tax jurisdictions to limit profit-shifting.
    - Support for a one-time tax on the stock of unrepatriated profits of multinationals as part of comprehensive reform; tax at a rate modestly lower than the current corporate tax rate.
    - Such a tax would generate a temporary, front-loaded uplift in fiscal revenues and payment could be spread over several years.
  - Individual income tax:
    - Provide tax relief for low- and middle-income groups to alleviate income polarization and encourage labor force participation.
    - Eliminate bulk of itemized deductions alongside increasing the standard deduction; cap remaining deductions (e.g., mortgage interest and charitable contributions).
    - Consider limiting tax preference for employer-provided health insurance.
    - Expand eligibility and increase generosity of the earned income tax credit (EITC) to support lower-income households and incentivize work.
    - To lessen the risk that expanded EITC leads to a decline in pre-tax wages at the bottom, combine EITC expansion with an increase in the federal minimum wage.
  - Pass-through entities:
    - Any rate reductions for pass-throughs must consider revenue implications.
    - Setting effective pass-through rates below rates on distributed corporate profits and/or top marginal personal rates creates incentives to recharacterize income; anti-avoidance provisions could limit this but increase administration burdens.
  - Consumption taxes and other revenue sources (to ensure revenue-gaining reform):
    - A broad-based, 5 percent consumption tax would generate around 1½ percent of GDP per year in revenues.
    - A carbon tax of around US$45 per ton of CO2 would generate 0.5 percent of GDP per year.
    - Each 50 cents increase in the gas tax would raise revenues by around 0.3 percent of GDP per year.
    - Moving from direct to indirect taxes is likely to be positive for long-run growth; progressive, targeted reductions in personal income tax could lessen income polarization.
- Box note: If reductions in personal income tax are designed to be progressive and targeted toward low- and middle-income households, they will help lessen income polarization.

### Authorities’ views on tax reform
- The administration aims to reduce distortions and provide tax relief for middle-income families, consulting with Congress and the public.
- Commitments include lowering individual income tax rates, eliminating various exemptions and deductions, expanding the standard deduction, and providing help for child and dependent care expenses.
- Intentions to eliminate the alternative minimum tax, the 3.8 percent surcharge on capital gains and dividends, and the estate tax.
- On business side: goal to lower corporate tax rate to 15 percent (including for pass-throughs), eliminate most tax expenditures and special regimes, and transition to a territorial system with a one-time repatriation tax on accumulated overseas income.
- The dynamic effect of this combination of reforms is expected by authorities to maintain the federal revenue-GDP ratio at close to current levels.
- The proposal to put in place either a carbon tax or consumption tax is not politically feasible at this time.

*Source: IMF staff consultation chapter text (cr17239).*

### 33.      Underinvestment in infrastructure

### 33.      Underinvestment in infrastructure

### Findings and problem statement
- Underinvestment in infrastructure has become a growing constraint on private sector productivity and long-term growth and job creation.
- Investment in public infrastructure has declined significantly in the post-recession period.
- Based on the American Society of Civil Engineers estimates of the U.S. infrastructure gap, a permanent increase in federal, state, and local infrastructure spending of at least 0.5 percent of GDP per year is needed.
- It will be important to ensure the right mix is achieved between the public funding of maintenance and repair versus new projects.

### Priorities for spending and investment
- Improve the quality and reliability of surface transportation.
- Upgrade infrastructure technologies (e.g., in high speed rail, ports, and telecommunications).
- Achieve an increase in federal, state, local and private funding of infrastructure projects.

### Policy measures and financing proposals
- The US$200 billion appropriation in the budget is aimed at catalyzing US$1 trillion in private and public infrastructure investment; if realized, it would support long-term growth.
- The administration is targeting an increase of US$1 trillion in infrastructure investment through a combination of new federal spending and incentives for greater private, state and local funding.
- The federal government is prepared to offer loans, loan guarantees, and lines of credit to support infrastructure projects with federal outlays concentrated on only the most transformative projects (priorities include motorways, roads, aviation, airports, and air traffic control systems).
- Efforts will be made, where feasible, to transfer responsibilities to state and local governments.
- Private provision of infrastructure will be leveraged to achieve better procurement methods, more market discipline, and a long-term focus on maintaining assets.
- The environmental review and permitting process is characterized as fragmented, inefficient, and unpredictable; the intent is to significantly streamline these processes to reduce approval times, increase certainty of project completion, and raise the return on investment.

### Authorities’ views (as stated)
- U.S. infrastructure needs to be rebuilt and modernized to create jobs, maintain economic competitiveness, and connect communities and people to opportunities.
- Federal outlays will be concentrated on the most transformative projects; priorities include motorways, roads, aviation, airports, and air traffic control systems.
- The administration emphasizes using federal incentives to attract greater private, state, and local funding, and favors leveraging private provision to improve procurement and asset maintenance.
- The administration intends to streamline environmental review and permitting processes to reduce time and cost and increase certainty and returns.

*Source: IMF staff report text (cr17239 - 33.      Underinvestment in infrastructure).*

### 45.      The administration is focused on reshaping existing U.S. trade agreements. The

### 45.      The administration is focused on reshaping existing U.S. trade agreements. The

### Trade policy: objectives and authorities’ views
- The administration has withdrawn from the Trans-Pacific Partnership and notified Congress of its intent to renegotiate NAFTA.
- Pursuing new and updated trade agreements could provide the administration an opportunity to address existing trade barriers while unlocking new sources of growth.
- Areas for more ambitious agreements include: transparency, e-commerce, services, labor, environmental and safety standards.
- The U.S. would benefit by remaining open as it pursues new or amended trade agreements and should avoid new import restrictions.
- Authorities’ view: free, fair and reciprocal trade and international investment can lead to economic growth and job creation but unfair trade practices have disadvantaged U.S. workers and businesses, leading to large and persistent trade imbalances.
- Trade-distorting practices cited for elimination: dumping, non-tariff barriers, forced technology transfer, non-economic capacity, subsidies and other non-market behavior and government support.
- Existing agreements—written decades ago—need reassessment for adequacy in promoting free and fair trade.
- Administration intends to:
  - Ensure trade and investment agreements enhance economic growth, break down export barriers, contribute favorably to the trade balance, and strengthen the manufacturing base.
  - Improve the functioning of the WTO dispute settlement system and ensure full and transparent implementation and timely enforcement of WTO agreements as originally written.
  - Focus more on bilateral negotiations to ensure more rapid progress toward new and revised trade agreements that focus on reciprocity.

### Deregulation
- Central plank: revisit federal regulations across a range of areas.
- U.S. already scores favorably on regulatory barriers to entrepreneurship, trade, and investment in international comparisons.
- Simplification, streamlining, and harmonization of federal regulations across states could boost efficiency and stimulate job creation, productivity, and growth.
- Alternative policy tools can achieve outcomes (example provided: replace regulatory limits on carbon with a broad-based carbon tax).
- Caution: reforms must avoid negative consequences for the environment, workplace safety, and protections for lower-income workers.
- Authorities’ view: current regulatory system is both ineffective and inefficient, imposing significant dead-weight costs; federal permitting practices (including for new infrastructure projects) are unnecessarily burdensome.
- Regulatory policy principle described: "For every new regulation that is introduced, two will be eliminated and the net cost of all new regulations will be zero."
- Administration expectation: these efforts will have a large positive effect on growth and investment with minimal side effects on environmental, safety, or worker protections.

### Maintaining a productive and flexible workforce — Education
- Access to better and more cost-effective education raises productivity and worker adaptability.
- Evidence that investments in education lessen intergenerational persistence of poverty.
- Statistics:
  - 70 percent of U.S. high school graduates enroll in college.
  - Only 60 percent of enrollees graduate within 6 years.
  - Median debt for those with a bachelor’s degree is around US$20,000.
- Concerns: rising delinquency rates; disparities in outcomes across race and family income; high student debt constraining consumption and household formation.
- Policy solutions:
  - K-12: prioritize early childhood education (including instituting universal pre-K) and support STEM programs; redesign public school financing to reduce funding differences across districts and provide more resources to high-poverty schools.
  - Vocational education: expand apprenticeship and vocational programs to offer attractive non-college career paths.
  - Tertiary education: focus on college preparation and retention; consider alternative financing such as expanding programs for, and lowering payment caps on, income contingent repayment loans or increasing needs-based grants.
- Note: proposed financing options are in the budget but accompanied by significant cuts to overall student loan programs and an intention to increase the monthly payment cap for income contingent loans.

### Family-friendly benefits and supporting low- and middle-income households
- Childcare constraints:
  - Labor force participation rate for women with children under 6 years old is 66 percent (around 8 percent below that of similar aged cohorts without young children).
  - One-in-four single parent households are living in poverty.
- Budget intent: create a program offering six weeks of paid leave to new parents and provide help for child and dependent care expenses.
- Supporting low- and middle-income households — policy options:
  - Disability insurance: strengthen design to provide incentives for beneficiaries to work part time or return to full time work, with careful protection for legitimate recipients.
  - Social assistance: reassess "cliffs" in benefits (Medicaid, SNAP, CHIP, TANF, housing assistance) to smooth phase-out for the near-poor; simplify and unify safety net programs; increase generosity of direct transfer programs; better-target federal payments to program outcomes. These improvements could be undertaken with a relatively small budgetary cost.
- Authorities’ view: no rationale to expand existing safety net programs; welfare reform should encourage return to work by tightening eligibility (including SNAP, EITC, and the child tax credit) and requiring able-bodied adults to work for benefits.
- Administration proposal: six weeks of paid parental leave funded partially by savings from federal unemployment insurance system.

### Immigration
- Demographic projections and labor force:
  - Labor force growth projected to slow from an annual average of over 1 percent over the last 25 years to less than ½ percent in the coming decade.
  - Dependency ratio expected to rise from about 60 percent today to 75 percent by 2037.
  - Projection includes around 0.6 million new immigrants entering the labor force each year.
- Policy argument: a comprehensive, skills-based immigration reform could expand the labor force, improve the dependency ratio, raise average human capital, and have positive effects on long-term potential growth and medium-term fiscal challenges.
- Authorities’ view: reform immigration to encourage merit-based admissions for legal immigrants, prohibit entry of illegal immigrants, substantially reduce number of refugees permitted to resettle, increase border security and law enforcement spending, and examine inefficiencies in H1B admissions to avoid undercutting local wages and employment prospects for U.S. citizens.

### Healthcare
- Proposed changes include removing individual and employer mandates, eliminating various taxes and subsidies, reversing Medicaid expansion, and giving states greater flexibility and control.
- Analysis summary:
  - Eliminating penalties for non-purchase of insurance will either lead to loss in coverage (with adverse selection) or necessitate increased federal subsidies to maintain coverage.
  - Proposed changes imply a significant increase in costs for older and poorer individuals while embedded tax relief would mostly benefit higher income households.
- Policy guidance:
  - Protect gains in coverage achieved since the financial crisis, particularly for lower-income individuals, to support well-being, productivity, labor force participation, and medium-term fiscal position.
  - Contain healthcare cost inflation by evaluating pilot programs, applying new technologies to increase efficiencies and pricing transparency, and assessing scope for anti-trust actions where market concentration has risen and premiums for non-group policies have been rising rapidly.
- Authorities’ view: Affordable Care Act is fundamentally flawed; proposed reforms aim to improve Medicaid sustainability, target federal resources to those most in need, eliminate taxes on investment income and the individual mandate penalties, stabilize and reform the individual insurance market; propose tax credits and health savings accounts and devolve regulatory oversight to states.
- Authorities dispute Congressional Budget Office estimates on loss of coverage under new legislation, arguing those estimates overstate the mandate’s impact and use an outdated baseline.

### Staff appraisal and macroeconomic assessment
- Near-term outlook favorable but clouded by medium-term imbalances.
- Key diagnoses and figures:
  - U.S. dollar is moderately overvalued by around 10–20 percent.
  - External position is moderately weaker than implied by medium-term fundamentals and desirable policies.
  - Current account deficit expected to be close to 3 percent of GDP over the medium-term.
  - Net international investment position has deteriorated markedly in the past several years.
  - Post-crisis growth has been too low and too unequal relative to historical performance.
- Policy priorities to address imbalances:
  - Spark faster economic and productivity growth, stimulate job creation, incentivize business investment, balance the budget, bring down public debt, and create room to finance priorities such as infrastructure.
  - Transformation should include: more efficient tax system, reprioritized federal spending, more effective regulatory system, labor market reforms, increased infrastructure spending, improved education and skills development, strengthened healthcare coverage while containing costs, family-friendly benefits, maintaining a free and fair trade regime, and reforming immigration and welfare systems.
- Fiscal guidance:
  - Right policy package may require incremental federal resources for infrastructure, education, health, social assistance, and family benefits, which should be accommodated within an overall budget envelope that shrinks the federal deficit starting in FY2018 and steadily reduces the public debt-GDP ratio.
  - Achieve this by reprioritizing existing spending, addressing entitlements, and ensuring tax reform generates a front-loaded increase in the revenue-GDP ratio.
- Financial sector and monetary policy:
  - Important gains have been made in financial oversight since the global financial crisis; scope exists to fine-tune the system but preserve the current risk-based approach to regulation, supervision, and resolution.
  - The Federal Reserve should continue to raise policy rates gradually.
  - Given downside risks to inflation and effective lower bound constraints, policymakers should be ready to accept some modest, temporary overshooting of its inflation goal to allow inflation to approach the 2 percent medium-term target from above.
  - Recent addendum to policy normalization principles and plans provides market participants with a clear path for changes in reinvestment policy to help avoid undue volatility in fixed-income markets.

*Source: INTERNATIONAL MONETARY FUND*

### 67.      It is recommended that the next Article IV consultation take place on the standard 12-

### It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### National production and income — Key projections and indicators
- Real GDP (annual percent change): 2016: 1.6; 2017: 2.1; 2018: 2.1; 2019: 1.9; 2020: 1.8; 2021: 1.7; 2022: 1.7
- Net exports (contribution to real GDP growth, percentage points): 2016: -0.1; 2017: -0.3; 2018: -0.2; 2019: -0.2; 2020: -0.2; 2021: -0.1; 2022: 0.0
- Total domestic demand (annual percent change): 2016: 1.7; 2017: 2.3; 2018: 2.3; 2019: 2.0; 2020: 1.8; 2021: 1.7; 2022: 1.7
- Private final consumption (annual percent change): 2016: 2.7; 2017: 2.2; 2018: 1.9; 2019: 2.0; 2020: 2.0; 2021: 1.9; 2022: 1.8
- Gross fixed domestic investment (annual percent change): 2016: 0.7; 2017: 4.3; 2018: 4.0; 2019: 2.9; 2020: 2.4; 2021: 2.6; 2022: 2.4
  - Private fixed investment: 2016: 0.7; 2017: 4.7; 2018: 3.9; 2019: 2.8; 2020: 2.3; 2021: 2.5; 2022: 2.6
  - Equipment and software: 2016: -2.9; 2017: 3.6; 2018: 4.9; 2019: 3.2; 2020: 2.3; 2021: 2.6; 2022: 2.5
  - Intellectual property products: 2016: 4.7; 2017: 4.1; 2018: 3.8; 2019: 3.6; 2020: 4.0; 2021: 4.0; 2022: 4.6
  - Residential structures: 2016: 4.9; 2017: 5.5; 2018: 3.6; 2019: 2.3; 2020: 2.0; 2021: 2.0; 2022: 2.0
- Nominal GDP (annual percent change): 2016: 3.0; 2017: 3.9; 2018: 3.9; 2019: 4.1; 2020: 3.9; 2021: 3.8; 2022: 3.7
- Personal saving rate (% of disposable income): 2016: 5.7; 2017: 5.1; 2018: 5.3; 2019: 5.2; 2020: 4.9; 2021: 4.8; 2022: 4.7
- Unemployment rate (percent): 2016: 4.9; 2017: 4.3; 2018: 4.3; 2019: 4.4; 2020: 4.7; 2021: 4.9; 2022: 5.0
- Output gap (% of potential GDP): 2016: -0.4; 2017: -0.1; 2018: 0.1; 2019: 0.2; 2020: 0.2; 2021: 0.1; 2022: 0.0
- CPI inflation (q4/q4): 2016: 1.8; 2017: 2.1; 2018: 2.5; 2019: 2.6; 2020: 2.1; 2021: 2.2; 2022: 2.3
- Fed funds rate (percent): 2016: 0.4; 2017: 1.0; 2018: 1.6; 2019: 2.5; 2020: 2.9; 2021: 2.9; 2022: 2.9

### Balance of payments — Projections and external position
- Real exports growth (goods and services, annual percent change): 2016: 0.4; 2017: 3.3; 2018: 3.1; 2019: 3.8; 2020: 2.9; 2021: 3.4; 2022: 4.0
- Real imports growth (goods and services): 2016: 1.1; 2017: 4.4; 2018: 3.9; 2019: 4.1; 2020: 3.2; 2021: 3.2; 2022: 3.4
- Net exports (contribution to real GDP growth): 2016: -0.1; 2017: -0.3; 2018: -0.2; 2019: -0.2; 2020: -0.2; 2021: -0.1; 2022: 0.0
- Current account balance (% of GDP): 2016: -2.4; 2017: -2.5; 2018: -2.9; 2019: -3.0; 2020: -3.0; 2021: -2.9; 2022: -2.8
- Nominal exports (goods and services, % of GDP): 2016: 12.0; 2017: 12.2; 2018: 12.2; 2019: 12.3; 2020: 12.5; 2021: 12.7; 2022: 12.8
- Nominal imports (goods and services, % of GDP): 2016: 14.7; 2017: 15.2; 2018: 15.5; 2019: 15.7; 2020: 15.8; 2021: 15.9; 2022: 16.0
- Financial account balance (% of GDP): 2016: -2.0; 2017: -2.9; 2018: -2.9; 2019: -3.0; 2020: -3.0; 2021: -2.9; 2022: -2.8
  - Direct investment, net (% of GDP): 2016: -0.9; 2017: -0.1; 2018: -0.5; 2019: -0.5; 2020: -0.4; 2021: -0.4; 2022: -0.5
  - Portfolio investment, net (% of GDP): 2016: -1.1; 2017: -2.2; 2018: -2.3; 2019: -2.4; 2020: -2.0; 2021: -1.4; 2022: -1.4
- Net International Investment Position (% of GDP): 2016: -44.8; 2017: -44.5; 2018: -45.7; 2019: -46.9; 2020: -48.2; 2021: -49.3; 2022: -50.3
- Memorandum: Current account balance (US$ billions): 2016: -452; 2017: -490; 2018: -576; 2019: -629; 2020: -649; 2021: -641; 2022: -656

### Federal and general government finances — Fiscal outlook and debt
- Federal government revenue (% of GDP): 2015: 18.2; 2016: 17.8; 2017: 17.3; 2018: 17.7; 2019: 17.8; 2020: 18.0; 2021: 18.1; 2022: 18.1; 2023: 18.2; 2024: 18.2; 2025: 18.3; 2026: 18.4
- Federal government expenditure (% of GDP): 2015: 20.7; 2016: 20.9; 2017: 20.7; 2018: 20.7; 2019: 21.2; 2020: 21.6; 2021: 21.9; 2022: 22.5; 2023: 22.5; 2024: 22.4; 2025: 22.8; 2026: 23.4
  - Interest (% of GDP): 2015: 1.2; 2016: 1.3; 2017: 1.4; 2018: 1.6; 2019: 1.8; 2020: 2.0; 2021: 2.2; 2022: 2.4; 2023: 2.5; 2024: 2.5; 2025: 2.5; 2026: 2.6
- Federal budget balance (percent of GDP, staff): 2015: -2.6; 2016: -3.2; 2017: -3.4; 2018: -3.0; 2019: -3.4; 2020: -3.5; 2021: -3.8; 2022: -4.4; 2023: -4.3; 2024: -4.2; 2025: -4.5; 2026: -5.0
- Federal debt held by the public (% of GDP): 2015: 73.3; 2016: 77.0; 2017: 77.3; 2018: 77.6; 2019: 77.8; 2020: 78.3; 2021: 79.2; 2022: 80.7; 2023: 82.1; 2024: 83.4; 2025: 84.9; 2026: 86.9
- General government gross debt (% of GDP): 2015: 105.7; 2016: 107.4; 2017: 108.5; 2018: 108.8; 2019: 109.1; 2020: 109.5; 2021: 110.2; 2022: 111.2; 2023: 111.9; 2024: 112.4; 2025: 113.0; 2026: 113.4
- Fiscal projections note: "Fiscal projections are based on the March 2016 Congressional Budget Office baseline adjusted for the IMF staff’s policy and macroeconomic assumptions."

### Core financial stability indicators and sectoral metrics (selected)
- Regulatory Capital to Risk-Weighted Assets (percent): 2010: 14.8; 2011: 14.7; 2012: 14.5; 2013: 14.4; 2014: 14.4; 2015: 14.1; 2016: 14.2
- Non-performing Loans to Total Gross Loans (percent): 2010: 4.4; 2011: 3.8; 2012: 3.3; 2013: 2.5; 2014: 1.9; 2015: 1.5; 2016: 1.3
- Return on Assets (percent): 2010: 0.2; 2011: 0.3; 2012: 0.3; 2013: 0.4; 2014: 0.3; 2015: 0.4; 2016: 0.4
- Liquid Assets to Total Assets (Liquid Asset Ratio, percent): 2010: 10.8; 2011: 12.7; 2012: 13.4; 2013: 14.5; 2014: 14.5; 2015: 13.2; 2016: 12.8
- Residential Real Estate Prices (percent change): 2010: -3.4; 2011: -0.8; 2012: 7.9; 2013: 10.2; 2014: 5.0; 2015: 5.4; 2016: 6.1
- Commercial Real Estate Prices (percent change): 2010: 11.2; 2011: 9.1; 2012: 5.3; 2013: 15.5; 2014: 10.4; 2015: 9.6; 2016: 5.9
- Other financial corporations: Assets to Gross Domestic Product (GDP): 2010: 362.1; 2011: 350.8; 2012: 362.7; 2013: 367.5; 2014: 366.2; 2015: 355.2; 2016: 359.9

### External sector assessment — Background, assessment, and policy recommendations
- External position and NIIP:
  - Background: "The net international investment position (NIIP) declined from -16.8 per cent of GDP in 2010 to -43.7 percent of GDP in 2016."
  - Staff baseline projection: "U.S. NIIP would deteriorate by about 10 percentage points of GDP over the next five years."
  - Assessment: Financial stability risks could surface if foreign demand for U.S. debt securities unexpectedly declines; risks remain moderate given the U.S. dollar accounting for 60 percent of global reserves.
- Current account (CA):
  - Background: CA deficit narrowed to 2.4 percent of GDP in 2016 from a pre-crisis maximum of 6 percent of GDP.
  - Projection: CA deficit expected to increase from 2016 through the medium-term due to stronger U.S. economy, dollar appreciation, and an assumed fiscal expansion.
  - Assessment: EBA model cyclically-adjusted CA gap for 2016 is -1.0 percent of GDP; staff view CA is between -0.7 and -1.7 percent weaker than level implied by fundamentals and desirable policies.
- Real exchange rate:
  - Background: REER appreciated in 2016 by about 3.1 percent compared to 2015; as of May 2017, appreciated about 0.7 percent relative to 2016 average.
  - Assessment: REER assessed as moderately overvalued in 2016 within a range of 10 to 20 percent; EBA REER index suggests an overvaluation of 15.8 percent.
- Capital and financial accounts:
  - Background: Net financial inflows about 3 percent of GDP in 2016, below pre-crisis levels of about 5 percent of GDP; portfolio inflows increased by about 1 percent in 2016; foreign demand for U.S. Treasury securities likely supported by reserve currency status.
  - Assessment: "The U.S. has a fully open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency and the U.S. role as a safe haven."
- FX intervention and reserves:
  - Assessment: "The dollar has the status of a global reserve currency. Reserves held by the U.S. are typically low relative to standard metrics but the currency is free floating."
- Potential policy responses (external sector):
  - Over time, fiscal consolidation recommended to lower debt-GDP ratio, aiming for a general government primary surplus of about ¾ percent of GDP (a federal government primary surplus of about 1 percent of GDP).
  - Structural policies within a declining fiscal deficit envelope to raise productivity, including: infrastructure investment; tax reform; better schooling and training of workers; measures to support the working poor; policies to increase growth in the labor force.
  - Net expected outcome: "Over time, raise efficiency, lift productivity, and reduce the CA deficit."

### Public Debt Sustainability Analysis — Summary findings and scenario framing
- Key finding: "The public debt ratio remains on an unsustainable trajectory over the medium term."
- Baseline assumptions and outcome:
  - Baseline assumes unchanged policies, with partial reversal of automatic spending cuts planned after FY2017 similar to past Bipartisan Budget Acts.
  - Under the baseline, "federal debt held by the public is projected to increase from about 77 percent of GDP in 2016 to around 88 percent of GDP in 2026, with general government gross debt rising from about 107 percent of GDP to around 113 percent of GDP by 2026."
- Policy recommendation summary:
  - A different composition of adjustment is desirable: reprioritization of budget programs and a revenue-gaining tax reform aimed at boosting potential growth would be "more desirable, sustainable and, thus, more credible."
- Contextual notes:
  - "Gross financing needs are large, but manageable given the global reserve currency status of the United States."
  - Recent legislative context referenced: Bipartisan Budget Acts of 2013 and 2015; Tax Act of 2015; President's FY2018 budget mentioned as suggesting substantial outer-year adjustments but staff baseline is based on current laws.

*International Monetary Fund.*

### 3.      Adjustment scenario. The 2016 general

### 3.      Adjustment scenario. The 2016 general government primary deficit was 2.3 percent of GDP.

### Medium-term fiscal target and rationale
- The 2016 general government primary deficit was 2.3 percent of GDP.
- Staff view: aim for a medium-term general government primary surplus of about ¾ percent of GDP.
  - Equivalent federal government surplus target: about 1 percent of GDP.
- Purpose of target: to put the public debt ratio firmly on a downward path.
- Note: The target primary surplus would have to be higher in the long run to bring the debt ratio closer to pre-crisis levels by 2030.

### Debt servicing costs and interest-growth dynamics
- Current favorable interest rate-growth differential benefits fiscal projections.
- Real interest rates have fallen well below GDP growth, reflecting accommodative monetary policy and the safe-haven status of the United States.
- Under staff’s baseline, the effective interest rate is projected to rise gradually from current historical lows and reach about 4.3 percent by 2026.
  - Comparison: average effective interest rate about 3½ percent over 2006–16.
- Implication: real interest rates will become a major debt-creating flow over the medium-term.

### Realism of baseline assumptions
- Baseline economic assumptions and fiscal projections are generally within the error band observed for all countries.
- The projected fiscal adjustment is ambitious but realistic based on consolidation episodes observed in 1990–2011.

### Stress tests and sensitivity of debt dynamics
- Public debt dynamics are highly sensitive to growth and interest rate assumptions because the U.S. public debt ratio already exceeds 100 percent of GDP.
- Specific stress outcomes:
  - An increase of 200 basis points in the sovereign risk premium would mean a debt ratio about 10 percentage points above the baseline (i.e., public debt in 2026 would be around 125 percent of GDP).
  - If real GDP growth is one standard deviation below the baseline, public debt would increase by about 10 percentage points above the baseline.
  - A scenario with a 1 percentage point slippage in planned consolidation over the next two years would increase public debt by about 5 percentage points above the baseline in 2026.
  - A combined macro-fiscal shock could raise the public debt ratio to as high as 140 percent of GDP by 2026.
- Exchange rate shock: unlikely to have important implications for debt sustainability because all debt is denominated in local currency and because of the reserve currency status of the dollar.
- Mitigating factor: depth and liquidity of the U.S. Treasury market and safe-haven status at times of distress.

### Public DSA – Baseline scenario: selected baseline figures and projections (as of June 30, 2017)
- Nominal gross public debt:
  - 2006–2014: 88.8 (percent of GDP)
  - 2015: 105.6
  - 2016: 107.4
  - 2017: 108.5
  - 2018: 109.0
  - 2019: 109.2
  - 2020: 109.4
  - 2021: 110.1
  - 2022: 111.2
  - 2023: 112.2
  - 2024: 112.4
  - 2025: 112.8
  - 2026: 113.4
- Spread (bp): 184
- Public gross financing needs (percent of GDP):
  - 2006–2014: 17.3
  - 2015: 13.8
  - 2016: 17.2
  - 2017: 24.1
  - 2018: 20.2
  - 2019: 19.4
  - 2020: 18.8
  - 2021: 20.3
  - 2022: 20.0
  - 2023: 20.8
  - 2024: 20.8
  - 2025: 22.0
  - 2026: 21.9
- Real GDP growth (percent):
  - 2006–2014: 1.3
  - 2015: 2.6
  - 2016: 1.6
  - 2017–2026: 2.1, 2.1, 1.9, 1.8, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7 respectively (2017 through 2026 shown as: 2.1, 2.1, 1.9, 1.8, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7)
- Inflation (GDP deflator, percent):
  - 2006–2014: 1.9
  - 2015: 1.1
  - 2016: 1.3
  - 2017–2026: 1.8, 1.8, 2.1, 2.1, 2.0, 1.9, 1.9, 1.9, 1.9, 1.9 respectively
- Nominal GDP growth (percent):
  - 2006–2014: 3.2
  - 2015: 3.7
  - 2016: 3.0
  - 2017–2026: 3.9, 3.9, 4.1, 3.9, 3.8, 3.7, 3.7, 3.7, 3.7, 3.7 respectively
- Effective interest rate (percent) 4/:
  - 2006–2014: 3.5
  - 2015: 2.3
  - 2016: 2.5
  - 2017: 1.2
  - 2018: 2.0
  - 2019: 2.2
  - 2020: 2.6
  - 2021: 3.0
  - 2022: 3.3
  - 2023: 3.6
  - 2024: 3.9
  - 2025: 4.1
  - 2026: 4.3
- Cumulative change in gross public sector debt (projections):
  - 2006–2014: 4.4
  - 2015: 0.4
  - 2016: 1.7
  - 2017: 1.1
  - 2018: 0.5
  - 2019: 0.2
  - 2020: 0.2
  - 2021: 0.7
  - 2022: 1.1
  - 2023: 1.0
  - 2024: 0.2
  - 2025: 0.4
  - 2026: 0.5
  - Total projected cumulative change: 6.0
- Identified debt-creating flows (annual, percent of GDP) and cumulative:
  - Identified flows total (annual examples): 4.8 (2006–2014), 0.2 (2015), 1.8 (2016), -0.7 (2017), -0.4 (2018), -0.3 (2019), 0.1 (2020), 0.6 (2021), 1.1 (2022), 1.1 (2023), 1.2 (2024), 1.4 (2025), 1.6 (2026)
  - Cumulative identified flows: 5.7
- Primary deficit (percent of GDP), annual series:
  - 2006–2014: 4.8
  - 2015: 1.6
  - 2016: 2.3
  - 2017: 2.2
  - 2018: 1.7
  - 2019: 1.6
  - 2020: 1.5
  - 2021: 1.5
  - 2022: 1.5
  - 2023: 1.1
  - 2024: 0.9
  - 2025: 0.9
  - 2026: 0.9
  - Cumulative primary deficit contribution: 13.7
- Primary (noninterest) revenue and grants (percent of GDP), 2006–2026 cumulative:
  - 2006–2014: 29.7; 2015: 31.3; 2016: 30.9; 2017–2026: 30.9, 31.2, 31.3, 31.4, 31.5, 31.5, 31.6, 31.6, 31.7, 31.7; cumulative: 314.4
- Primary (noninterest) expenditure (percent of GDP), 2006–2026 cumulative:
  - 2006–2014: 34.5; 2015: 32.9; 2016: 33.2; 2017–2026: 33.0, 32.8, 32.9, 32.9, 32.9, 33.0, 32.7, 32.6, 32.6, 32.6; cumulative: 328.1
- Automatic debt dynamics (percent of GDP) and decomposition:
  - Automatic debt dynamics, cumulative contribution: -8.0
  - Interest rate/growth differential, cumulative contribution: -8.0
  - Of which real interest rate (annual examples): 1.2 (2006–2014), 1.3 (2015), 1.2 (2016), -0.6 (2017), 0.2 (2018), 0.1 (2019), 0.5 (2020), 0.9 (2021), 1.4 (2022), 1.8 (2023), 2.1 (2024), 2.3 (2025), 2.5 (2026); cumulative: 11.1
  - Of which real GDP growth (annual examples): -1.1 (2006–2014), -2.6 (2015), -1.7 (2016), -2.2 (2017), -2.2 (2018), -2.0 (2019), -1.9 (2020), -1.8 (2021), -1.8 (2022), -1.8 (2023), -1.8 (2024), -1.8 (2025), -1.8 (2026); cumulative: -19.1
- Net privatization proceeds: 0.0 (each year)
- Contingent liabilities: 0.0 (each year)
- Other liabilities (bank recap. and PSI sweetner): 0.0 (each year)
- Residual, including asset changes (annual examples and cumulative):
  - -0.4 (2006–2014), 0.2 (2015), -0.1 (2016), 1.8 (2017), 0.9 (2018), 0.5 (2019), 0.1 (2020), 0.1 (2021), 0.0 (2022), -0.1 (2023), -1.0 (2024), -1.0 (2025), -1.0 (2026); cumulative: 0.3
- Debt-stabilizing primary balance (percent of GDP): 0.7

Notes in table footnotes preserved in source:
- 1/ Public sector is defined as general government
- 2/ Based on available data
- 3/ Bond Spread over German Bonds
- 4/ Defined as interest payments divided by debt stock at the end of previous year
- 5/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation
- 6/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g
- 7/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).
- 8/ For projections, this line includes exchange rate changes during the projection period. Also includes ESM capital contribution, arrears clearance, SMP and ANFA income, and the effect of deferred interest
- 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year

### Composition of public debt and alternative scenarios (selected assumptions)
- Baseline scenario assumptions (2017–2026 excerpt):
  - Real GDP growth (2017–2026): 2.1, 2.1, 1.9, 1.8, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7
  - Inflation (2017–2026): 1.8, 1.8, 2.1, 2.1, 2.0, 1.9, 1.9, 1.9, 1.9, 1.9
  - Primary balance (percent of GDP, 2017–2026): -2.2, -1.7, -1.6, -1.5, -1.5, -1.5, -1.1, -0.9, -0.9, -0.9
  - Effective interest rate (2017–2026): 1.2, 2.0, 2.2, 2.6, 3.0, 3.3, 3.6, 3.9, 4.1, 4.3
- Constant primary balance scenario assumption (2017–2026 excerpt):
  - Primary balance constant at -2.2 (percent of GDP) through 2017–2026
  - Effective interest rate example series: 1.2, 2, 2, 3, 3, 3, 4, 4, 4, 4

### Stress-test scenarios and selected underlying assumption variations (2017–2026)
- Primary Balance Shock scenario: primary balance series includes values such as -2.2 (2017), -3.4 (2018), -3.4 (2019), -1.5 (2020), with effective interest rates evolving to 4.3 by 2026.
- Real GDP Growth Shock scenario: real GDP growth example series includes 2.1 (2017), 0.4 (2018), 0.2 (2019), 1.8 (2020), with effective interest rates evolving to 4.3 by 2026.
- Real Interest Rate Shock scenario: effective interest rate series includes 1.2 (2017), 2.0 (2018), 2.4 (2019), 2.9 (2020), 3.4 (2021), 3.9 (2022), 4.3 (2023), 4.6 (2024), 4.9 (2025), 5.1 (2026).
- Combined Shock scenario and Contingent Liability shock illustrated with corresponding primary balance and effective interest rate paths.
- Stress-test implications graphically show gross nominal public debt (percent of GDP) rising under shocks to levels such as 125 percent and higher through 2026, and public gross financing needs rising in several scenarios.

### Risk assessment highlights
- Bond Spread over German Bonds (basis points, 3-month average): 198 bp (reference to recent period)
- External Financing Requirement benchmark considerations and gross financing needs benchmark: gross financing needs benchmark of 20 percent (cells highlighted in green/yellow/red per table logic in source).
- Public debt held by non-residents: 31 percent (source table entry)
- The DSA includes predictive density evolution of gross nominal public debt percentiles and heat-map style risk assessment across shocks and indicators.

### FSAP Recommendations — Macroprudential framework and implementation status (selected items)
- Recommendation 1: Provide an explicit financial stability mandate to all FSOC member agencies.
  - Finding: Several agencies continue to have no explicit legal mandate to support financial stability. Some FSOC agencies, including the U.S. federal banking agencies, have responsibilities that include key roles in maintaining financial stability.
  - Implementation status: Not implemented.
- Recommendation 2: Include in FSOC Annual Report specific follow-up actions for each material threat identified.
  - Finding: FSOC’s 2015 and 2016 Annual Reports discuss each material threat in detail, provide updates on regulations and measures, and outline research agenda; specific timelines and responsible agencies are not identified.
  - Implementation status: Partially implemented.
- Recommendation 3: Publish the current U.S. macroprudential toolkit and prioritize further development.
  - Finding: Macroprudential toolkit remains to be centrally published and prioritized. Recommended further development and implementation of time-varying tools like the countercyclical capital buffer (CCyB). Necessary final steps on application triggers required to implement the CCyB should be completed; scope to alter risk-weights on particular types of lending needs assessment; macroprudential tools could be used in real estate sector (e.g., varying maximum loan-to-value and debt-to-income ratios).
  - Implementation status: Partially implemented.
  - Additional development: In September 2016, the Federal Reserve approved a final policy statement detailing the framework for setting the CCyB, including a range of financial-system vulnerabilities and indicators the FRB may consider.
- Recommendation 4: Expedite heightened prudential standards for designated non-bank systemically important financial institutions (SIFIs).
  - Finding: In 2015, FRB adopted enhanced prudential standards (EPS) for GECC; GECC was de-designated in June 2016. On June 3, 2016, FRB approved ANPR and a notice of proposed rulemaking to apply EPS to systemically important insurance companies consistent with Dodd-Frank Act requirements.
  - Implementation status: Partially implemented.
- Recommendation 5: Improve data collection, and address impediments to inter-agency data sharing.
  - Findings and progress:
    - OFR Interagency Data Inventory (IDI) had annual update in March 2017; inventory used to identify data gaps and improve research and analysis.
    - Specific restrictions to data sharing mean listing does not imply universal access across agencies.
    - OFR, FRB, New York Fed, and SEC completed pilot data collections about bilateral repos and securities lending activity; OFR made summary of findings publicly available on its website.
    - Steady progress noted, but areas needing more work:
      - (i) The collection of data on securities lending, and bilateral repos is still at an early stage;
      - (ii) Outstanding obstacles to interagency data sharing should be reduced, as recommended in the FSAP.
  - Implementation status: (Context indicates ongoing progress; text under heading states progress has been made.)

*Source: IMF staff (content unit: cr17239 - 3.      Adjustment scenario. The 2016 general).*

### Section 21(c)(7) of the Commodity Exchange Act directs swap data repositories to make

### Section 21(c)(7) of the Commodity Exchange Act directs swap data repositories to make

### Swap data access under Section 21(c)(7) and CFTC rulemaking
- Section 21(c)(7) directs swap data repositories to make swap data available to certain enumerated domestic authorities and any other person the Commodities Futures Exchange Commission (CFTC) determines to be appropriate, which may include certain types of foreign authorities.
- In 2011, the CFTC adopted rules implementing these statutory swap data access provisions by establishing processes by which various categories of entities could gain access to swap data held by swap data repositories.
- In January 2017, the CFTC issued a proposed rule to amend the 2011 access requirements such that certain domestic authorities may obtain swap data access efficiently. The domestic authorities include: prudential regulators; the FSOC; the S; the Department of Justice; any Federal Reserve Bank; and the OFR.
- The comment period for the proposed revisions closed in March 2017.
- Implementation status noted: Partially implemented.

### Regulation and supervision — supervisory objectives and inter-agency coordination
- The multi-agency framework established by statute requires coordination to avoid duplication and contradictory rules or guidance.
- The Federal Financial Institutions Examination Council (FFIEC) is used to promote consistent approaches to bank supervision; the federal banking agencies and the Consumer Financial Protection Bureau (CFPB) have an MOU to coordinate exam scheduling and require sharing of exam reports and comments prior to issuance to institutions.
- By statute, consumer protection is the responsibility of the CFPB and the relevant federal banking agency.
- Federal banking agencies examine for safety and soundness under the Uniform Financial Institutions Rating System.
- Implementation status noted: Partially implemented.

### Strengthening banking supervisory framework, concentration limits, and risk guidance (FSAP recommendations 7–12)
- Concentration risk:
  - The FRB issued Regulation XX (final rule in November 2014) to implement Section 622 of the DFA and establish a financial sector concentration limit.
  - Regulation XX prohibits a financial company from merging or consolidating with, or acquiring control of, another company if the resulting company’s liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.
  - In March 2016, the FRB proposed a rule to address single-counterparty credit risk applying credit limits to Bank Holding Companies (BHCs) with total consolidated assets of $50 billion or more, with specific exposure limits:
    - (i) GSIBs restricted to a credit exposure of no more than 15 percent of the firm’s Tier 1 capital to another systemically important financial firm, and up to 25 percent of the firm’s tier 1 capital to another counterparty;
    - (ii) non-GSIB BHCs with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance-sheet foreign exposure, restricted to a credit exposure of no more than 25 percent of the firm’s tier 1 capital to another counterparty;
    - (iii) BHCs with $50 billion or more in total consolidated assets restricted to a credit exposure of no more than 25 percent of the firm’s total regulatory capital to another counterparty;
    - (iv) BHCs with less than $50 billion in total consolidated assets, including community banks, would not be subject to the proposal.
  - Comparable supervisory guidance on other risk concentrations remains to be issued.
  - Implementation status noted: Partially implemented.
- Guidance on operational risk and interest rate risk:
  - Supervisory guidance and reporting requirements in operational risk have not been updated to reflect FSAP recommendations.
  - The approach to interest rate risk in the banking book does not include specific capital charges or limits under Pillar 2; US guidance requires proper oversight of models and analysis of risk under a variety of scenarios. Data is collected during examinations.
  - Implementation status noted: Partially implemented.
- Limit structures for related party lending: No progress made; implementation status: Not implemented (statement: "No progress has been made towards implementation of the FSAP recommendation.")
- Insurance regulation and valuation:
  - Supervisory/regulatory architecture for insurance firms unchanged; implementation status: Not implemented.
  - Principle-based Reserving Valuation Manual operative on January 1, 2017 for 45 States and territories that adopted it; some States have not adopted; risk models still approved at State level — standards may not be fully harmonized. Implementation status: Partially implemented.
- Group supervision and group-level capital for insurers:
  - April 2016: FRB approved proposed consolidated financial reporting requirements for systemically important insurance companies designated by the FSOC.
  - June 2016: FRB approved ANPR on conceptual capital frameworks; proposed enhanced prudential standards for systemically important insurers (chief risk officer and chief actuary required).
  - State insurance regulators via NAIC developing group capital calculation; timeline developed in late 2016 for work through 2017 and 2018.
  - As of June 2017, all 50 states, DC, and Puerto Rico adopted updated NAIC model holding company act enhancing group supervisory authorities.
  - Implementation status: Partially implemented.
- SEC and CFTC resourcing:
  - Publicly available information suggests no progress toward providing needed resources and funding stability; implementation status: Not implemented.
- Asset manager examination coverage:
  - SEC examined 11% of investment advisers in fiscal year 2016 and expects to examine 13% in fiscal years 2017 and 2018.
  - SEC allocated new staff to IA/IC program and transitioned resources to increase IA/IC program size.
  - Implementation status: Partially implemented.
- Explicit risk management/internal controls for asset managers and commodity pool operators:
  - FSOC reviewed asset management risks and published an update in April 2016.
  - SEC adopted October 2016 rules requiring open-end funds to have liquidity risk management programs with certain required elements.
  - Implementation status: Partially implemented.
- Equity market structure assessment:
  - SEC issued proposals related to equity market structure, approved the consolidated audit trail, and uses the Equity Market Structure Advisory Committee.
  - Implementation status: Partially implemented.

### Stress testing, network analysis, and liquidity stress testing (FSAP recommendations 14–16)
- Solvency stress tests:
  - CCAR and DFA stress tests remain supervisory solvency stress tests where second-round effects are not explicitly incorporated but are implicitly captured via macro scenarios and market shocks.
  - Global market shock based on second half of 2008 asset price movements.
  - Participating banks compute outcomes under the default of the counterparty whose default would cause the largest losses under the market shock.
  - Federal Reserve undertaking research program (per former Governor Tarullo speech, September 2016) to better understand quantitative consequences of new risks, amplification channels, and dynamics between capital and liquidity.
  - Implementation status: Partially implemented.
- Liquidity regulation and stress testing:
  - Authorities finalized Liquidity Coverage Ratio (LCR) and proposed Net Stable Funding Ratio (NSFR) for BHCs with at least $50 billion in assets.
  - LCR is a short-term liquidity stress test; NSFR contains elements of liquidity stress testing via runoff rates and haircuts.
  - Stress testing exercises (DFA/CCAR) focus on credit and market risk, not funding and market liquidity risk; authorities do not yet conduct regular liquidity stress tests on nonbanks.
  - SEC requires MMFs to conduct regular stress tests including liquidity; certain large broker-dealers provide additional liquidity information to SEC staff.
  - Network analysis integration with liquidity/solvency stress tests: DFA/CCAR do not integrate risk classes beyond credit and market risk; contagion/spillover risks enter implicitly through macro dynamics. OFR conducted research on network models.
  - The Federal Reserve's CLAR program reviews liquidity stress testing practices and firms' internal stress tests annually.
  - Implementation status: Partially implemented.
- Insurance stress tests:
  - State insurance regulators assess insurer-conducted stress tests via ORSA under the Risk Management and Own Risk Assessment Model Act (adopted by 47 states); will become NAIC accreditation requirement on January 1, 2018.
  - No macroprudential insurance sector stress testing by regulators yet; timeline estimates stress testing process development could begin fall 2017.
  - Implementation status: Partially implemented.
- Asset management liquidity stress testing:
  - FSOC reviewed asset management risks and issued an April 2016 update focusing on liquidity and redemption risk, leverage, operational functions, securities lending, and resolvability.
  - SEC finalized rules in October 2016 requiring open-end funds to have liquidity risk management programs and adopted enhanced data reporting and limited swing pricing permissions.
  - Implementation status: Partially implemented.

### Market-based finance and systemic liquidity (FSAP recommendations 17–21)
- Mutual funds and MMMFs:
  - FSOC expressed views supporting tools to allow funds to allocate redemption costs to redeeming investors to reduce first-mover advantage and mitigate fire sales; recommended regulators assess effective tools and scope.
  - SEC September 2015 proposed rule welcomed; October 2016 SEC adopted rules requiring enhanced reporting and open-end funds’ liquidity risk management programs; rules permit swing pricing under certain circumstances.
  - IMF staff recommended floating NAVs for MMMFs; SEC rules require floating NAVs for institutional prime MMMFs but allow retail and government MMMFs to continue amortized cost constant NAVs with new tools—liquidity fees and redemption gates.
  - Rules fully implemented in October 2016.
  - Implementation status: Partially implemented.
- Triparty repo (TPR) reforms:
  - Intraday credit extended to collateral providers reduced by over 95 percent due to reforms.
  - Clearing banks limited to funding a maximum of 10 percent of a dealer’s notional tri-party book through pre-committed lines (incurring a capital charge).
  - Alignment of GCF repo service by one U.S. CCP with triparty settlement process changes; U.S. CCP offering the GCF service suspended inter-dealer GCF repo activity as of July 15, 2016.
  - Residual fire-sale risk remains; data gaps limit regulators’ ability to monitor aggregate repo market and interdependencies.
  - Regulators to monitor market responses to new SEC MMF rules fully implemented in October 2016 and assess regulatory/data gaps for other cash management vehicles.
  - Implementation status: Implemented.
- Securities lending disclosures and reporting:
  - Early 2016: OFR, FRB, and SEC completed a joint securities lending data collection pilot from seven voluntary lending agents.
  - April 2016: FSOC encouraged proposing/adopting a permanent securities lending data collection rule; agencies continue consultation.
  - October 2016: SEC adopted new reporting requirements for registered investment companies including securities lending information.
  - Implementation status: Partially implemented.
- Broker-dealer regulation — liquidity and leverage:
  - Regulatory measures include margin rules for securities transactions, central clearing, and margin requirements for uncleared swaps.
  - SEC proposed funding liquidity stress tests for broker-dealers approved to use VaR models; certain large broker-dealers provide liquidity information to SEC staff.
  - December 2015: FRB, FDIC, OCC, FCA, and FHFA issued a final rule on capital and margin requirements for common swap entities; another final rule specified exemptions for certain non-cleared swaps.
    - Compliance with initial margin and variation margin effective for largest participants in September 2016.
    - Variation margin became effective for remaining participants in March 2017.
    - Initial margin to be phased-in each year through September 2020 for remaining participants based on declining notional amounts.
  - U.S.-EU Common Approach for Transatlantic CCPs OTC Derivatives Reform reached agreement (mutual recognition of CCPs subject to compliance).
  - Implementation status: Partially implemented.
- Data availability across repo and securities lending:
  - OFR’s Bilateral Repo Data Collection Pilot Project underway; triparty and GCF repo market data published regularly.
  - SEC’s October 2016 reporting requirements include securities lending activities.
  - Data collection on securities lending remains scarce; information collection on securities lending and bilateral repos at an early stage.
  - Implementation status: Partially implemented.

### Liquidity backstops, crisis preparedness, and resolution (FSAP recommendations 22–27)
- Primary Credit Facility as monetary instrument:
  - Federal Reserve evaluating elements of its long-run operating framework; idea studied as part of project.
  - Implementation status: Not implemented.
- Fed lending to solvent systemically important non-banks:
  - November 2015: Federal Reserve approved final rule specifying procedures for emergency lending under Section 13(3) of the Federal Reserve Act.
  - Final rule defines "broad-based" as “a program or facility that is not designed for the purpose of aiding any number of failing firms and in which at least five entities would be eligible to participate.”
  - Solvent non-banks designated as systemically important by the FSOC could participate in programs to the extent they satisfy facility eligibility requirements.
  - Implementation status: Partially implemented.
- FSOC crisis preparedness and management role:
  - Crisis preparedness and management has not been formally assigned to the FSOC; no progress reported.
  - Implementation status: Not implemented.
- Extension of Orderly Liquidation Authority (OLA) and cross-border resolution:
  - Systemically important U.S. insurance holding companies can be resolved using OLA powers; resolution of individual legal entity insurance subsidiaries falls to State-based regimes.
  - State-based regimes have been used historically but not tested on insurance subsidiaries of systemically important holding companies.
  - Single Point of Entry resolution strategy generally would not affect branches of foreign banks in the U.S.
  - Implementation status: Partially implemented.
- Powers to support foreign resolution measures and depositor preference extension:
  - Depositor preference rules under the FDI Act can complicate coordination and increase likelihood of ring-fencing by host authorities; hosts could require branch deposit agreement amendments to extend preference to overseas depositors.
  - Implementation status: Partially implemented.
- Recovery and resolution planning for SIFIs:
  - Recovery planning responsibilities placed on firms’ senior management and boards; plans updated at least annually.
  - September 29, 2016: OCC issued enforceable recovery planning guidelines for supervised institutions with average total consolidated assets of $50 billion or more.
  - FDIC developed resolution plans for G-SIFIs compliant with Key Attributes.
  - Living wills (resolution plans) are required under the DFA and have been reviewed by FRB and FDIC; progress made on resolvability including adherence to ISDA 2015 Universal Resolution Stay Protocol, issuance of long-term holding company debt, operational continuity steps, legal entity rationalization, and enhanced liquidity monitoring.
  - Firm-specific cooperation agreements meeting Key Attributes executed for all U.S. G-SIBs and for one U.S. G-SII.
  - December 2016: Federal Reserve Board approved final rule imposing TLAC and long-term debt requirements on eight U.S. GSIBs and on U.S. intermediate holding companies (IHCs) of foreign GSIBs; final rule consistent with FSB TLAC standard but stricter in some respects and imposes clean holding company requirements.
  - Implementation status: Partially implemented.

### Financial market infrastructures (FSAP recommendation 28)
- Identify and manage system-wide risks related to interdependencies among FMIs, banks, and markets:
  - U.S. authorities (FRB, SEC, CFTC) advanced efforts to increase resilience and recoverability of FMIs, particularly CCPs; participated in international work streams.
  - Domestic actions:
    - Adopted risk management standards for systemically important FMIs, including recovery and orderly wind-down expectations.
    - Implemented regulatory requirements for recovery plans; authorities examining viability and comprehensiveness.
    - Actively engaging in resolution planning for systemic CCPs; 2017 inaugural CMG meetings co-hosted for two U.S. systemic CCPs (Chicago Mercantile Exchange and Ice Clear Credit, LLC).
    - October 2016: FRB, FDIC, and OCC issued ANPR on enhanced cyber risk management standards for large/interconnected entities and service providers, including FMIs.
    - September 2016: CFTC issued final cybersecurity testing rules for FMIs and markets.
  - International engagement:
    - Participation in the Study Group in Central Counterparty Interdependencies (SGCCI) established by FSB/IOSCO/BCBS; results scheduled for publication in late June of 2017.
    - Participation in CPMI-IOSCO drafting of consultative draft on Framework for Supervisory Stress Testing of CCPs, consultative/final report on Resilience of CCPs, and consultative/final report on Recovery of FMIs; consultative versions published August 2016, final versions scheduled for late June (year implied by context).
  - Implementation status: Implemented.

*Italicized source attribution: IMF staff report content as provided in the supplied PDF excerpt.*

### 2017.  U.S. authorities also contributed to CPMI-IOSCO’s report on “Guidance

### cr17239 - 2017.  U.S. authorities also contributed to CPMI-IOSCO’s report on “Guidance

### Cyber resilience, FMIs, and CCP resolution
- U.S. authorities contributed to CPMI-IOSCO’s report on “Guidance on cyber resilience for financial market infrastructures” published in June 2016.
- U.S. authorities participated in the FSB work streams on:
  - resolution of CCPs, and
  - the continuity of access to FMIs for members in resolution.
- Continued work recommended:
  - stress-testing interdependencies between financial institutions, market infrastructures and financial markets to arrive at a holistic view regarding financial stability risks.

### Federal Reserve accounts for designated FMUs (implementation)
- Policy action: Offer Fed accounts to designated Financial Market Infrastructures (FMUs) to reduce dependencies on commercial bank services.
- Implementation detail:
  - By October 2016, the Federal Reserve Bank of Chicago authorized three U.S. clearing houses (run by CME Group and Intercontinental Exchange) and the Options Clearing Corporation to open accounts at the central bank.
  - The measure has been possible as clearing houses have been designated as systemically important utilities.
- Status: Implemented.

### Housing finance — reform momentum and policy actions
- Assessment:
  - Housing finance and the U.S. housing market have not been reformed comprehensively.
  - To date, no legislative or executive action has been taken to reduce substantially the footprint of Government Sponsored Entities (GSEs).
- Administrative measures and conservatorship actions:
  - As conservator, FHFA has required market-based credit risk transfers from the GSEs to the private sector.
  - Since 2015, the GSEs have been directed by FHFA to fund the Housing Trust Fund and Capital Magnet Funds by transferring a portion of total new acquisitions to the Housing Trust Fund (as required by the 2008 Housing and Economic Recovery Act).
  - FHFA may suspend Enterprise allocations to affordable housing funds if allocations contribute to the Enterprise’s financial instability.
  - Senior Preferred Stock Purchase Agreements (PSPA’s) between the Treasury and each Enterprise:
    - ensure the ability of each Enterprise to meet its financial obligations,
    - ensure they will have minimal net worth as all profits above the capital reserve amount are transferred to Treasury each quarter.
  - The capital reserve amount has been declining by $600 million per year and is scheduled to decline to $0 on January 1, 2018. That declining capital retention amount is expected to spur momentum for housing finance reform.
- Regulatory and market effects:
  - The “Qualified Mortgage” (QM) rule (September 21, 2015) provides smaller banks protection against lawsuits under the Ability-to-repay regulation, potentially giving smaller banks a competitive advantage and broader extension of housing credit.
  - Large banks continue to tighten standards and reduce mortgage exposure, resulting in an increase in nonbanks’ market share.
- Legislative and policy developments:
  - Policymakers have been evaluating and developing potential comprehensive overhaul options for the mortgage finance system, including alternatives analyzed by the Congressional Budget Office (CBO): a fully federal agency, a hybrid public-private market, a market with a government guarantor of last resort, and a largely private secondary market.
  - The Senate Banking Committee is working on comprehensive housing finance reform and has started hearings and meetings.
  - On June 12, 2017, the Department of the Treasury published a comprehensive report containing recommendations for the financial regulation of banks and credit unions titled “A Financial System that Creates Economic Opportunities: Banks and Credit Unions”.
  - In 2017, the House passed the Financial Choice Act legislation emphasizing regulatory relief for small banks and credit unions and replacing the Dodd-Frank Act.
- Status: Not implemented (comprehensive housing market reform).

### Annex IV — Response to Past Policy Advice (summary)
- 1. Fiscal policy
  - Staff view: Public finances remain on an unsustainable path; importance of fixing long standing fiscal problems and normalizing the budget process.
  - Bipartisan Budget Acts of 2013 and 2015 were welcome steps but did not address medium-term fiscal sustainability.
  - Staff recommended: adopt a medium-term fiscal consolidation plan to restore long-run fiscal sustainability, slow entitlement spending, expand the near-term budget envelope via front-loaded infrastructure spending, a better tax system, active labor market policies, and improving educational spending funded by offsetting savings in future years.
  - Actions taken: As part of the Bipartisan Budget Act and Protecting Americans from Tax Hikes Act, authorities expanded the near-term deficit and made permanent various tax measures (including improvements to the EITC, the research and experimentation tax credit, and child tax credit advocated by staff).
- 2. Financial policies
  - Staff recommendations (based on 2010 and 2015 FSAPs): tackle financial sector risks, particularly activities in nonbank intermediaries.
  - Progress made: enhanced capital and liquidity buffers, strengthened underwriting standards in the housing sector, greater transparency to mitigate counterparty risks, and progress in collecting more comprehensive information to assess risks.
  - Remaining reforms to be completed: address vulnerabilities of money market funds and the tri-party repo market, reduce data blind-spots, improve risk management and stress testing of asset managers, enhance effectiveness of the FSOC, simplify institutional structure for financial oversight, and increase resilience of the insurance sector.
- 3. Structural policies
  - Staff recommendations: expand the EITC, increase the minimum wage, invest in infrastructure and education, improve the tax system, use active labor market policies, implement a broad skills-based approach to immigration reform.
  - Partial progress: some states and localities increased minimum wages and mandated paid family leave.
  - Little progress: building consensus on tax reform as envisaged by staff, increasing public investment in infrastructure, immigration reform, raising the gas tax, introducing a VAT or carbon tax, or reorienting the education system.
- 4. Housing finance
  - Staff stressed policies to encourage greater availability of mortgage credit while clarifying government’s future role in housing finance.
  - Administrative measures have reduced regulatory uncertainties and transferred risks from the agencies to private investors through market transactions, but legislative proposals to fundamentally reshape housing finance have made little headway.

### Fund relations — membership and resources (as of May 31, 2017)
- Membership Status: Joined: December 27, 1945; Article VIII.
- General Resources Account (SDR Million; Percent of Quota):
  - Quota 82,994.20 100.00
  - IMF's Holdings of Currency (Holdings Rate) 75,258.50 90.68
  - Reserve Tranche Position 7,771.92 9.36
  - Lending to the Fund — New Arrangements to Borrow 5,894.59
- SDR Department (SDR Million; Percent of Allocation):
  - Net cumulative allocation 35,315.68 100.00
  - Holdings 36,380.76 103.02
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 1.05 1.05 1.05 1.05 (for 2017, 2018, 2019, 2020, 2021 as applicable)
  - Total: 1.05 1.05 1.05 1.05
- Exchange Rate Arrangements:
  - The exchange rate of the U.S. dollar floats independently and is determined freely in the foreign exchange market.
  - The United States has accepted the obligations under Article VIII, Sections 2(a), 3 and 4 of the IMF's Articles of Agreement and maintains an exchange system free of multiple currency practices and restrictions on current international transactions, except for measures imposed for security reasons.
  - The United States notifies measures imposed for security reasons under Executive Board Decision No. 144–(52/51). The last notification was made June 3, 2016.
- Article IV Consultation:
  - The 2017 Article IV consultation was concluded on July 24, 2017 and the Staff Report was published as IMF Country Report No. [17/xxx].
  - The 2017 Article IV discussions took place May 15–June 16, 2017. Concluding meetings with Chair Yellen and Treasury Secretary Mnuchin occurred on June 20.
  - A press conference on the consultation was held on June 27, 2017.
  - The team comprised Nigel Chalk (head), Yasser Abdih, Ali Alichi, Stephan Danninger, Emanuel Kopp, Andrea Pescatori, Damien Puy (all WHD), Celine Rochon, Sandra Lizarazo and Elizabeth Heuvelen (SPR), Thornton Matheson and Adrian Peralta (FAD). Mr. Sunil Sabharwal (Executive Director), Mr. Mark Sobel (Senior Advisor), and Ms. Mary Svenstrup (Advisor) attended some of the meetings.

### Statistical issues and data availability (as of June 28, 2017)
- Assessment: Comprehensive economic data are available on a timely basis; quality, coverage, periodicity, and timeliness are adequate for surveillance. The United States adheres to the Special Data Dissemination Standard Plus.
- United States: Table of Common Indicators Required for Surveillance (Date of latest observation; Date received; Frequency of data; Frequency of reporting; Frequency of publication)
  - Exchange rates: Same day; Same day; D; D; D
  - International reserve assets and reserve liabilities of the monetary authorities: 2017 M4; May 26; M; M; M
  - Reserve/base money: June 22; June 22; W; W; W
  - Broad money: June 22; June 22; W; W; W
  - Central bank balance sheet: June 22; June 22; W; W; W
  - Interest rates: Same day; Same day; D; D; D
  - Consumer price index: 2017 M5; June 14; M; M; M
  - Revenue, expenditure, balance and composition of financing—general government: 2017 Q1; May 30; Q; Q; Q
  - Revenue, expenditure, balance and composition of financing—central government: 2017 M5; June 12; M; M; M
  - Stocks of central government and central government-guaranteed debt: 2017 M5; June 7; M; M; M
  - External current account balance: 2017 Q1; June 20; Q; Q; Q
  - Exports and imports of goods and services: 2017 M4; June 2; M; M; M
  - GDP/GNP (2nd release): 2017 Q1; May 26; Q; M; M
  - Gross External Debt: 2016 Q4; March 31; Q; Q; Q
  - International Investment Position: 2017 Q1; June 28; Q; Q; Q

*Prepared by the Western Hemisphere Department (in consultation with other departments); July 6, 2017.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17239.pdf_