The International Monetary Fund yesterday called on the US to review President George Bush's landmark $1,350 billion (€1,505 billion) tax cut, saying it might be necessary to raise taxes or cut spending to ensure sound public finances over the next few years.
In their annual report on the US economy, the fund's directors said the actual cost of the tax cut, which became law in June, was likely to be larger than the headline figure, because Congress would probably be forced to extend some tax reductions due to expire within the next 10 years.
Spending was also likely to be higher than the limits imposed by the budget plans proposed by the president and Congress.
Shortly after the fund's Article IV report came out, the dollar fell, pushing the euro up to a three-and-a-half-month high of $0.904.
"Given the uncertainties about the final costs of the tax cut, the ability to contain discretionary spending and the accuracy of fiscal forecasts, the IMF board recommended that spending increases and multi-year tax cuts should be implemented flexibly so as to ensure that there will be sufficient resources over the medium term to finance these measures," it said.
The IMF's report is unlikely to cause much concern among the administration's policymakers. US officials and the fund's economists have often found themselves at odds over the outlook for the US economy.
Given the scale of the US economy and Washington's outsized weight within the IMF, its reports do not have the same effect on the US as they have on smaller governments.
"Other countries don't have the facility we in the US have of reading the Article IV report, saying 'thank you very much' and putting it straight in the trash can," was the view once expressed by Joseph Stiglitz, chairman of former president Bill Clinton's council of economic advisers.
The IMF's views will, however, provide ammunition for Democrats who have argued that the tax cut was too large and could jeopardise the Social Security state pension scheme and the Medicare health insurance programme.
The report is also likely to be cited by some Republicans who want Congress to make more aggressive spending cuts.
The fund's directors praised the Federal Reserve's aggressive easing of monetary policy this year. But they were non-committal about the prospects for the US economy in the immediate future. The report observed that the current account deficit, running at an annual rate of about $450 billion, or 4.5 per cent of gross domestic product, was unsustainable and threatened a sharp reversal in the dollar's strength. Separately , the Commerce Department reported that retail sales were flat in July, for the second month running. But excluding car sales, spending rose 0.2 per cent.
Stripping out the effect of falling petrol prices on the overall sales figures, spending was up 0.6 per cent.
