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INTERNATIONAL MONETARY FUND
2004 Article IV Consultation with the United States of America
Concluding Statement of the Fund Mission
(May 21, 2004)1.
The U.S. recovery has gathered considerable momentum since last year, againleading the global recovery.
 The economy has weatheredan unprecedented series of adverse shocks—including thecollapse of the IT-bubble,terrorist attacks, geopoliticaluncertainties, and weaknessesin corporate governance—andhas been expanding stronglysince mid-2003.Encouragingly, the upturnreflects continuing exceptionalU.S. productivity growth, inaddition to the sizable injectionof monetary and fiscalstimulus.2.
Most indicators point to a robust expansion in 2004 and give confidence that theUnited States will continue to act as the key engine for global growth,
 
especially in thecontext of relative weakness of demand abroad.
Support from household and governmentspending is projected to ease in the coming year as the effects of policy stimulus wane.However, corporate sector profitability and cash flow have rebounded strongly, businessinvestment is picking up, and net exports are expected to benefit from the dollar’s recentdepreciation. Some downside risks remain, including from the geopolitical situation and itsimplications for energy prices. Moreover, there remains the possibility of a more abruptslowdown of household demand given the low household saving rate, relatively sluggishemployment growth, and concerns regarding overvaluation in some real estate markets andlarge consumer debt loads. However, these risks appear balanced by the possibility of further upside surprises to the economy’s supply side.3.
With the improved near-term outlook, the coming year provides an importantopportunity for withdrawing policy stimulus and putting in place the conditions neededfor a durable and sustained expansion:
•
 
Fiscal sustainability
. The key challenge is to entrench a lasting framework for restoring fiscal surpluses and paying down federal debt ahead of the retirement of the
-3-2-10123456197019741978198219861990199419982002-3-2-101234564-quarter percent change Average1970-1994 Average1995-2000Recessions
Productivity growth has remained strong.
 
- 2 - baby-boom generation while moving rapidly on entitlement reform. Such an objectivewould anchor an improvement in national saving and avoid U.S. fiscal deficitscrowding out investment at home and abroad.
•
 
 An orderly withdrawal of monetary stimulus
.
The ongoing recovery creates room to begin adjusting interest rates to more neutral levels, and the Federal Reserve hasalready prepared the ground for the withdrawal of stimulus.
 
•
 
 Leadership on trade and financial sector policies
. With multilateral trade talks at acritical juncture, and weaknesses in corporate governance continuing to be a concerndomestically and abroad, the United States has an important opportunity to continueits leadership role in these areas.
 Fiscal policy
4.
The FY2005 budget has signaled a welcome shift toward fiscal consolidation inthe coming two years.
Although the recent stimulus has provided valuable support to theeconomy, with the recovery now well on track, the deficit reduction assumed for FY2005 andFY2006—roughly 2 percentage points of GDP—is appropriate. Encouragingly, there are alsosigns that the FY2004 deficitcould be smaller than originallyestimated. However, fiscal prospects in the next two yearsremain subject to importantuncertainties—including withregard to ongoing operations inIraq and Afghanistan and the budgetary cost of a number of legislative initiatives presently before Congress. The challengewill be to contain such pressuresand to ensure that the better-than-expected results this year are used to strengthensubsequent deficit-reductionobjectives.5.
A similarly ambitious rate of deficit reduction beyond the next two years wouldhelp place the long-run fiscal position on a more sustainable basis.
Recent budgetdocuments have highlighted that federal deficits and debt will start to rise over time as the baby-boom generation begins to retire and place increased demands on entitlements. Indeed,the long-term fiscal imbalance has widened in recent years as a result of tax cuts and theexpansion of Medicare benefits. Therefore, the deficit reduction that is currently envisagedafter FY2006 appears modest and may also be challenging, since it assumes success inlowering nondefense discretionary spending as a share of GDP to its lowest level sincethe 1960s and a sharp increase in taxpayer liabilities under the Alternative Minimum Tax.
151617181920212223199719992001200320052007200920112013151617181920212223ExpendituresRevenuesSurplusBudget Forecast Staff Forecast
 
DeficitIn percent of GDP, fiscal years
The FY2005 Budget projects significant consolidation throughFY2006 and a more gradual path subsequently.
 
- 3 -6.
Against thisbackground, we continue torecommend aiming for abalanced budget, excludingSocial Security, say by theend of the decade.
Whileentitlement reform holds thekey to long-run fiscalsustainability, based on pastexperience it can take a longtime to design and phase inmeasures that would place such programs on a sound financialfooting. Restoring a fiscalsurplus equal to the cash-flowsurplus of the Social Securitysystem by the end of the decadewould allow U.S. federal debtto be paid down ahead of theretirement of the baby-boomgeneration, and provide greater fiscal room to build consensusaround and implemententitlement reforms. Moreover,staff analysis suggests thatreducing the budget deficit by1 percentage point of GDPannually through the rest of thisdecade—roughly the rateenvisioned for FY2005–06— could provide significantsupply-side benefits to theUnited States and elsewhere byreducing pressures on globalinterest rates and investment,with only modest effects onshort-term activity.7.
The recovery providesa valuable opportunity forembarking upon the fiscaleffort that is needed toachieve such a medium-termobjective
. The Administrationhas supported re-authorizing a
Social SecurityExpenditureSocial SecurityPayroll Taxes3.03.54.04.55.05.56.06.57.02000201020202030204020502060207020803.03.54.04.55.05.56.06.57.0
Underfunding of Social Security could be dealt with by reformssuch as indexing accrued benefits to prices rather thanwages...
In percent of GDPPremiums andPayroll Taxes02468101214162000201020202030204020502060207020800246810121416
... while the unfunded liabilities of Medicare are larger anddriven by cost increases as much as demographic pressures.
In percent of GDP
Medicare Expenditure
Federal DebtHeld by SS/HITrust FundFederal DebtHeld by Public050100150200250300350400450500200020102020203020402050206020702080050100150200250300350400450500In percent of GDP
In the absence of reforms, Federal debt is projected to risesteadily as a ratio to GDP.
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