MF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending.
While the impact of the package passed by Congress in December is only just beginning to be understood, its effects are likely to include increased consumption and “hopefully the payment of higher wages,” Lagarde said on a panel at the Munich Security Conference in Germany on Friday. It also will fuel inflation, she said.
“What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.
The IMF chief’s blunt assessment follows an unusually public disagreement between the fund and President Donald Trump’s administration last fall over an IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich.
Competitive tax cuts risk holding back governments in spending on anything from defense and infrastructure to health and education, Lagarde said.
“You need public money,” she said. “The race to the bottom is not conducive to those investments and to helping prepare the workforce and our societies for this new economy of tomorrow.”