2016 Article IV Consultation with the United States of America: Concluding Statement of the IMF Mission
IMF News, June 22, 2016
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- Published: June 22, 2016
Overall assessment and headline statistics
- The United States economy is, overall, in good shape: a total of 2.4 million new jobs were created over the past year and unemployment has fallen to 4.7 percent.
- Real household disposable income is growing at 3 percent.
- Growth forecasts: 2.2 percent in 2016 and 2.5 percent in 2017.
- The output gap is expected to close by end-2017 and PCE inflation is expected to rise slowly toward 2 percent.
- At current levels of the real effective exchange rate, the current account deficit is expected to rise above 4 percent of GDP by 2020, implying the U.S. dollar is overvalued by 10-20 percent.
- Long-run fiscal concern: federal debt is projected to begin rising in 2019 and exceed 80 percent of GDP by 2022.
- Poverty and labor statistics: 1 in 7 Americans is living in poverty, including 1 in 5 children and 1 in 3 female-headed households; around 40 percent of those in poverty are working.
Near-term growth, risks, and outlook
- Recent quarters show a temporary growth setback driven by:
- contraction in energy sector investment;
- weak non-energy, non-residential investment;
- persistent drag from net exports (linked to weaker global growth and a stronger dollar);
- slower consumer demand despite solid housing and generally sound balance sheets.
- Two-sided risks to the outlook:
- Symmetric risk from the U.S. dollar; upside from oil (delayed consumption effects and smaller investment drag); downside from continued weakness in non-oil corporate investment.
- Global downside risks to growth could be a headwind.
- A key uncertainty: weaker activity may reflect a lower potential growth rate and smaller output gap, which could raise near-term inflationary pressures and necessitate a more assertive increase in policy rates with negative global spillovers.
- Jobs data caution: the latest jobs report raises concerns growth may be losing momentum, though jobs are typically a lagging indicator and high-frequency indicators point to reacceleration in Q2.
Structural challenges: demographics, productivity, and inequality
- Structural headwinds identified:
- Aging population and rising share of labor force shifting into retirement;
- Crumbling basic infrastructure and declining public capital stock;
- Weak productivity growth and reduced dynamism in reallocating human and physical capital.
- Distributional trends and labor share:
- Labor’s share of income is around 5 percent lower than 15 years ago;
- The middle class has shrunk to its smallest size in the last 30 years;
- Income and wealth distribution increasingly polarized; poverty has risen.
- Total factor productivity has slowed significantly since the late 1990s; this is part of a global trend.
Poverty and labor force participation — findings and priorities
- Urgent need to tackle poverty given current incidence: 1 in 7 overall, 1 in 5 children, 1 in 3 female-headed households, and 40 percent of the poor are working.
- Falling labor force participation is partly demographic but can be mitigated through policy.
- Priority measures to support work and participation:
- Improve the Earned Income Tax Credit (EITC) including eligibility for workers without dependents, those under 25, and older workers not yet eligible for social security.
- Increase the federal minimum wage.
- Upgrade social programs for the nonworking poor.
- Provide means-tested childcare support and introduce paid family leave in line with ILO conventions.
- Rework the disability insurance program to incentivize part-time work.
- Adopt comprehensive skills-based immigration reform to change demographic trends, reduce dependency ratio, and raise average human capital.
Supply-side reforms to boost productivity and skills
- Infrastructure:
- Urgent expansion of infrastructure investment, particularly surface transportation and technology upgrades (high speed rail, ports, telecommunications).
- Estimated cost: about 5–8 percent of GDP over the next 10 years.
- Seek innovative public and private financing solutions.
- Education and skills:
- Improve K-12 spending effectiveness; prioritize early childhood education and financing universal pre-K.
- Raise effectiveness of STEM programs.
- Increase funding for training programs, vocational partnerships, apprenticeships, and state-level training.
- Expand needs-based support for tertiary and vocational education.
- Trade integration:
- Ratify the Trans Pacific Partnership (TPP), conclude a trade and investment treaty with Europe, and resist all forms of protectionism.
- Anticipate transition costs for trade-affected workers and mitigate via training, temporary income support, and job search assistance, including use of trade adjustment assistance.
Fiscal framework and recommended fiscal measures
- Medium-term fiscal objective:
- IMF staff recommend targeting a medium-term federal government primary surplus of about 1 percent of GDP (general government primary surplus of about ¾ percent of GDP) to achieve a sustained downward path for public debt.
- Tax reform recommendations:
- Comprehensive reform aiming to remove exemptions, simplify the system, rebalance from direct to indirect taxes, and reduce statutory rates for individual and corporate income taxes.
- Corporate tax: adopt a territorial system with a minimum rent tax on foreign earnings; mandatory tax on existing stock of un-repatriated foreign-sourced earnings with payment spread over several years; tighten income-stripping rules and limit interest deductions.
- Personal income tax: make structure more progressive, consider capping itemized deductions (including mortgage interest).
- Generate additional revenues through introduction of a federal level VAT and a broad-based carbon tax, including an increase in the federal gas tax (18 cents per gallon since 1993).
- Pension reform:
- Early steps toward fundamental reform of the pension system: raise the income ceiling for social security contributions, index benefits and contribution provisions to chained CPI, raise the retirement age, and increase progressivity in benefits.
- Healthcare cost containment:
- Further measures to lower future healthcare costs: better coordination of chronic care, greater cost sharing, efficiency technologies (electronic health records, remote consultations, international outsourcing of diagnostics), and shift incentives from procedure-based pay to outcomes-based payments.
- Consider higher Medicare premiums to address financial imbalances.
Fiscal process and institutional recommendations
- Avoid repeating political brinkmanship over appropriations and the debt ceiling; consider:
- Replacing the debt ceiling with a bipartisan medium-term fiscal objective (with integrated budget functions and numerical goals for debt and deficit).
- Alternatively, automatic adjustment of the debt ceiling consistent with broader budget agreements.
- Consider shifting to a two-year budget cycle to reduce electoral-calendar-driven budget volatility.
Monetary policy guidance
- Monetary policy should remain data dependent.
- Recommendation: proceed along a very gradual upward path for the fed funds rate, mindful of global disinflationary trends and the need to confirm wage and price inflation momentum.
- Given downside risks to inflation and asymmetries posed by the effective lower bound, staff recommend accepting some modest, temporary overshooting of the Fed’s inflation goal to allow inflation to approach the Fed’s 2 percent medium-term target from above.
- The Fed should communicate clearly that its medium-term inflation goal is symmetric and be prepared to raise rates on a more front-loaded timetable if wage or price inflation accelerates beyond current forecasts.
Financial sector stability and regulatory stance
- Banking system:
- Regulatory reforms and improved risk management have strengthened the U.S. banking system.
- Pockets of vulnerability: non-systemic banks concentrated in distressed sectors (notably energy and mining) may see higher loan losses; potential worsening in auto and commercial real estate loan quality could increase provisioning needs.
- These pockets are unlikely to be systemic.
- Nonbank intermediation:
- Intermediation continues to migrate from banks to nonbanks (e.g., mortgage origination and servicing); associated risks require close examination.
- Asset managers: accelerate work to build a more complete and transparent data landscape and implement comprehensive stress testing focused on liquidity and counterparty risks.
- Life insurance industry: adopt a coordinated, nationally consistent approach to regulation, valuation, solvency, supervision, and stress testing; assign oversight to an independent national agency and implement enhanced prudential standards for designated institutions without further delay.
- Preserve gains from post-crisis financial oversight:
- Maintain enhanced capital and liquidity requirements, strengthened underwriting standards, greater transparency, and limits on proprietary trading.
- Oppose wholesale or broad-based dilution of the Dodd-Frank Act while allowing judicious recalibration based on experience.
AML/CFT, correspondent banking, and beneficial ownership transparency
- Withdrawal of correspondent banking relationships presents spillover risks for some countries; drivers include:
- shortcomings in AML/CFT frameworks in recipient countries, higher supervisory scrutiny, profitability concerns, changing liquidity and capital requirements, reputation concerns, regulatory clarity issues, data privacy conflicts, and economies of scale in compliance.
- Recommendations to alleviate correspondent banking frictions:
- Recipient countries adhere to international AML/CFT standards and share tax information.
- U.S. regulators continue outreach and clarification of expectations; acknowledge no certainty or “safe harbor” can be promised.
- U.S. efforts to assist recipient countries to build capacity and foster solutions to data privacy impediments.
- Explore mechanisms for U.S. financial intermediaries to pool compliance resources and exploit economies of scale (specialist transfer/clearing services, common platforms, client information sharing) and to vary risk-pricing of correspondent services to better reflect compliance costs.
- Beneficial ownership transparency:
- The current lack of uniform beneficial ownership transparency in the U.S. requires a more structured, uniform, and complete solution.
- Because corporate registration and trusts are governed by states, federal legislation is needed to make beneficial ownership information readily available to regulatory and law enforcement bodies.
Concluding Statement of the IMF Mission, United States: 2016 Article IV Consultation, June 22, 2016.