IMF director fears tax cuts will overheat economy

The International Monetary Fund’s (IMF) top official said Thursday that a set of U.S. tax cuts signed into law by President Trump in December would likely boost economic growth and trade, but warned of soaring budget deficits and of an “overheating impact” on the economy.

Christine Lagarde, the IMF’s managing director, told Reuters in an interview that the tax cuts could lift U.S. economic growth by 1.2 percent through 2020 while also boosting global growth.

“To the extent that growth is higher in the U.S. and because the U.S. is a very open economy, it will probably increase the demand from the U.S. to the other economies around the world, and that’s also a positive,” Lagarde told Reuters.

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But the tax cuts and expected growth could also spur inflation and, in turn, prompt officials to hike interest rates.

“Because of the stimulus impact that it will have on growth, and because the U.S. economy is already growing at full capacity, it might very well have an overheating impact on the economy, which could in turn increase wages — good — increase inflation and entail a tightening of monetary policy, with interest rates rising,” she said.

The Republican-led tax cuts dramatically lowered the corporate tax rate, from 35 percent to 21 percent, and offered more modest, temporary cuts in individual tax rates.

The IMF had previously advised the U.S. to implement a simpler corporate tax code. 

Still, the tax plan has spurred concerns about rising budget deficits in the U.S. The Center for a Responsible Federal Budget, a watchdog group, has said the deficit could surpass $1 trillion as early as next year.