IMF Executive Board Concludes 2021 Article IV Consultation with the United States

IMF News, July 22, 2021

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Bibliographic details

• Published: July 22, 2021

Overview

• The Executive Board concluded the Article IV consultation with the United States on July 19, 2021.
• The U.S. pandemic resulted in close to 600,000 deaths.
• New cases of COVID-19 and the test positivity rate fell significantly in 2021, aided by mask mandates, social distancing, shut down orders, and over half the eligible population being fully vaccinated.
• The receding case numbers are expected to allow normal activities to resume and provide a substantial economic boost.

Economic outlook and near-term dynamics

• The U.S. economy is expected to grow by around 7 percent in 2021 as:
  • savings are drawn down,
  • demand shifts back to in-person services,
  • depleted inventories are rebuilt.
• Disruptive supply and demand mismatches are possible as the economy normalizes, including in the labor market, but these are expected to be transitory.
• The significant employment gap should help contain wage and price pressures.

Policy support underpinning the recovery

• Fiscal support:
  • The American Rescue Plan (adopted March 2021) contained 8.2 percent of GDP in federal spending, in addition to the December fiscal package.
  • Fiscal support included extensions for small businesses, expanded unemployment insurance, and household transfers via stimulus checks.
  • These packages supported demand, helped avoid corporate bankruptcies, and relieved financial stress on households and state and local governments.
• Monetary policy:
  • The Federal Reserve committed to allow inflation to overshoot the 2 percent target in the near term.
  • This facilitated accommodative monetary policy amid low neutral rates and provided clear forward guidance tied to actual inflation outcomes and inflation expectations.

Administration policy proposals and fiscal outlook

• The American Jobs Plan and American Families Plan propose:
  • redistributing resources toward vulnerable households,
  • investing in infrastructure,
  • incentivizing human capital accumulation and labor force participation,
  • improving productivity,
  • reducing carbon emissions and increasing climate resilience.
• Proposed revenue measures include:
  • higher statutory corporate tax rate,
  • a global minimum tax,
  • increases in the top marginal rate of personal income tax,
  • increases in the rate high income earners pay on capital gains.
• On a net basis, the Administration’s fiscal plans would leave federal government debt 3¼ percent of GDP higher at end-2030.

Executive Board assessment: key findings

• Directors agreed with the thrust of the staff appraisal and welcomed pandemic control efforts and strong policy support.
• Noted costs and vulnerabilities:
  • Significant increase in public debt.
  • Widening current account deficit.
  • Increased corporate and nonbank leverage with rising asset valuations.
  • Pandemic’s heavy toll on low income households.
• Outlook caveats:
  • Outlook subject to evolution of the pandemic and congressional adoption of proposed fiscal measures.

Executive Board recommendations and policy priorities

• Fiscal policy:
  • Policy adjustments necessary to lower the fiscal deficit and put public debt on a gradual downward path over the medium term.
  • Consider raising revenues, including through a carbon tax, higher taxation of fuels, and a broad-based federal consumption tax.
  • Lessen the impact of an aging demographic on future spending.
  • Better targeting of spending to strengthen macroeconomic and distributional outcomes and trigger larger boosts to aggregate supply.
• Tax policy and administration:
  • Welcomed proposals to increase taxes on corporates and high-income households, close tax loopholes, remake the international corporate tax system, and increase resources for the Internal Revenue Service.
• Monetary policy and communication:
  • Noted Federal Reserve actions were highly effective; endorsed near-term overshooting of the two-percent inflation target under the new framework.
  • Urged the Fed to communicate well in advance to ensure orderly and transparent withdrawal of asset purchases and monetary accommodation.
• Financial stability and market structure:
  • Systemic financial stability risks appear close to the historical average, but pandemic revealed shortcomings in stress functioning of systemically important U.S. markets and institutions.
  • Urged serious consideration of structural changes in the operation of the Treasury market, key money markets, and prime money market funds.
• External sector and trade:
  • Noted the current account deficit increased during the pandemic and the external position is weaker than implied by medium-term fundamentals and desirable policies.
  • Urged the authorities to roll back trade restrictions and tariff increases and avoid currency-related trade responses.
  • Encouraged constructive U.S. engagement with trading partners to strengthen the rules-based multilateral trading system.

Procedural note

• It is expected that the next Article IV consultation with the United States will be held on the standard 12-month cycle.

United States: Selected Economic Indicators (Projections)

• Real GDP (annual growth)
  • 2019: 2.2
  • 2020: -3.5
  • 2021: 7.0
  • 2022: 4.9
  • 2023: 1.9
  • 2024: 1.7
• Real GDP (q4/q4)
  • 2019: 2.3
  • 2020: -2.4
  • 2021: 8.0
  • 2022: 2.8
  • 2023: 1.8
• Unemployment rate (q4 avg.)
  • 2019: 3.6
  • 2020: 6.8
  • 2021: 4.4
  • 2022: 3.1
  • 2023: 3.0
  • 2024: 3.2
  • 2025: 3.4
• Current account balance (% of GDP)
  • 2019: -2.2
  • 2020: -3.1
  • 2021: -3.8
  • 2022: -3.6
  • 2023: -3.4
  • 2024: -3.0
  • 2025: -2.7
  • 2026: -2.5
• Fed funds rate (end of period)
  • 2019: 0.1
  • 2020: 0.2
  • 2021: 0.7
  • 2022: 1.4
  • 2023: 2.1
• Ten-year government bond rate (q4 avg.)
  • 2019: 0.9
  • 2020: 2.4
  • 2021: 2.7
• PCE Inflation (q4/q4)
  • 2019: 1.5
  • 2020: 1.2
  • 2021: 4.3
  • 2022: 2.0
• Core PCE Inflation (q4/q4)
  • 2019: 1.6
  • 2020: 3.7
  • 2021: 2.6
  • 2022: 2.5
• Federal fiscal balance (% of GDP)
  • 2019: -4.6
  • 2020: -14.9
  • 2021: -15.1
  • 2022: -8.0
  • 2023: -5.7
  • 2024: -4.8
  • 2025: -4.5
• Federal debt held by the public (% of GDP)
  • 2019: 79.2
  • 2020: 100.1
  • 2021: 104.9
  • 2022: 103.6
  • 2023: 105.8
  • 2024: 106.6
  • 2025: 107.3

IMF Executive Board Concludes 2021 Article IV Consultation with the United States, Press Release No. 21/224 (July 22, 2021).

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF COVID-19 Hub
• Policy Tracker
• Financial Assistance
• Questions & Answers
• United States and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home