On 25 February 2026 the IMF issued a report following consultations with the US under Article IV of the IMF’s articles of agreement.
The IMF notes that the US economy performed well in 2025 and economic growth reached 2.2% by the end of 2025. The economy was driven by continued strong productivity growth, but activity in the fourth quarter was affected by a government shutdown. Employment growth slowed, but unemployment remained at 4.3% in January 2026.
The IMF report projects a modest increase in economy activity in the near term, resulting from the tax and spending changes introduced in 2025. Much of the increase in activity will be a result of the more generous tax treatment of capital spending and a lower household income tax burden. The report projects that from 2029 onwards fiscal policy will tighten as some of the tax provisions expire, and there will be a drag on economic growth.
The tariff increases are expected to slightly lower the trade deficit and collect around 0.75% of GDP in revenue in the near term. They do however represent a negative supply shock to the economy. This is projected to raise the personal consumption expenditures (PCE) price index and reduce the level of output by around 0.5%.
The report indicates that economic growth is expected to increase in 2026 to around 2.4%. Potential upsides to the economic outlook arise from the deregulatory efforts which could spur investment, release supply constraints and reduce energy costs. The increase in labour productivity over the past three years could continue, especially if technology adoption accelerates.
The reduced taxation of tips and overtime pay, and the increases in the child tax credit, are expected to increase household incomes. However, reductions in Medicaid and food assistance, combined with higher tariffs, will lower real disposable incomes for people in the lowest third of the income distribution.
Higher tariffs create costs by distorting the allocation of productive resources. The tariffs can disrupt global supply chains and undermine the benefit of international trade. The US should work with its trading partners towards a coordinated reduction in trade restrictions and aim to reduce industrial policy distortions. Any trade and investment measures put in place for national security reasons should be applied narrowly, minimizing their negative effects.
The IMF report recommends that a different set of policies could better achieve the administration’s goals without the negative outward spillovers, and with a more favourable distributional outcome. The policies could include permanently applying full expensing to all corporate investment and providing tax incentives for private savings. A range of opportunities for tax avoidance could be removed. The earned income tax credit could be increased, and the child tax credit could be better targeted. The tariffs could be replaced with a destination-based consumption tax.
