I was delighted to host G7 Finance Ministers and Central Bank Governors over the last two days; we've had a very successful meeting.
We are pleased to see the global economy continuing its expansion. The outlook continues to be favorable for 2005, despite the unwelcome news of oil prices, and we all agreed that improving growth must be our top priority.
The United States remains a leading contributor to the global expansion. Real GDP rose 4.4 percent in 2004 on an average annual basis, the largest in five years. Evidence so far on the first quarter points to continued strength. Job growth has been revitalized, with the economy creating 3.1 million new jobs since the employment trough of May 2003. Inflation remains moderate. These achievements reflect well-timed execution of carefully-designed monetary and fiscal policies.
The U.S. is strongly committed to reducing the budget deficit. We recognize that this is vital for continued robust growth for the U.S. economy as well as for the international financial system. We are also committed to reducing the longer term deficit which reflects our unsustainable, unfunded obligations such as Social Security.
The Administration expects a deficit of $427 billion this fiscal year. At 3.5 percent of GDP, this is substantially lower than the 4.5 - 6 percent experienced at times in the 1980s and 1990s, but still too large. Deficits matter, they are unwelcome, and must come down. And with tight controls on discretionary spending and increased revenue stemming from the expanding economy, we expect to cut the deficit in half to well under 2% of GDP by 2009.
Colleagues have asked me about the President's effort to reform our retirement system. The President's initiative to reform the Social Security system is an important part of the United States' economic future. We must plan for the future and that means dealing with looming financial threats when we see them. In the case of Social Security, there is no denying the demographic reality that will lead to insolvency of the system. The President has initiated a national dialogue that we hope will encourage the Congress to enact swift and meaningful reform to preserve, protect and strengthen Social Security for all generations of American workers.
The Bush Administration is also pursuing reform of the U.S. tax code, which has grown too long, complicated and cumbersome - a poor match for our flexible, free-market economy. The President has appointed an advisory panel to study the problems of the current code and propose potential solutions, keeping in mind that any new system of taxation must achieve increased fairness, simplicity and ease of understanding, as well as promote economicgrowth and job creation.
We each face our own challenges and responsibilities, like Social Security and tax code reform, but global adjustment is a shared responsibility. The United States is doing its part to reduce the fiscal deficit. Growth in parts of Europe and in Japan remain modest, leaving the global recovery less balanced than it had been. Europe and Japan must step up to the challenges of structural reform in order to build up the foundation for growth. The G7 Ministers agree on the need for greater growth in the world economy particularly among the large industrialized economies. We are committed to reducing the barriers to growth which we find in each of our economies as reflected in our Agenda for Growth. This is an action-oriented program for reforms to which we are all committed.
I want to comment specifically on China in this context. China's strong economic growth has made a tremendous contribution to the global economy. China has taken numerous steps over the last few years, including preparing for greater flexibility in their exchange rate, introducing foreign exchange market financial products and strengthening banks and bank supervision. With this groundwork in place, China is ready now to adopt a more flexible exchange rate.
Energy issues were a subject of intense discussion during our meetings. High energy prices act as a drag on the global expansion. In the United States, President Bush is concerned about the impact of high gas prices on American families and our economy. We feel strongly that the U.S. Congress must act to pass comprehensive energy legislation. President Bush put forth a national energy policy four years ago that addresses both supply and demand, and America has waited long enough for Congress to act. It is time to put partisanship aside and enact energy legislation.
Extending the benefits of growth to all the world's citizens remains a key priority for the United States and for the G7. The U.S. commitment is clear - for instance, we have nearly doubled our development assistance since 2000 to help boost growth and reduce poverty in developing countries and tripled aid to sub-Saharan Africa. The next step, in our view, is to extend 100 percent reduction of HIPC countries' IDA and African Fund debt. We believe that the tide is shifting in favor of such a cancellation approach.
For its part, the IMF needs to substantially improve its engagement in low-income countries. A major step forward in this regard is the agreement among the G7 this weekend to support a new policy monitoring arrangement in the IMF. This type of facility would allow low income countries to engage intensively with the Fund, even when they do not face balance of payments financing needs and without increasing their debt. I urge the IMFC to move forward on this important step later today. We also called for the IMF to make its low income lending more responsive to short-term adjustment needs.
More broadly with respect to the Bretton Woods institutions, we had the opportunity to assess progress under the Strategic Review that was initiated in the G7 and that is now being carried through in the institutions themselves. Fundamental for both institutions is the need to clarify the underlying missions, to set priorities in line with their missions so that they can deliver results while avoiding budget creep. In the IMF, surveillance can and must be further improved, and we all agreed to work together to accomplish this in particular by pushing for the IMF to provide debt sustainability assessments separately from proposed lending programs. In the World Bank, key concerns are enhancing transparency and accountability, particularly with respect to internal controls, and implementing improvements in results measurement.
We are grateful to Jim Wolfensohn for the extraordinary leadership he has provided for the World Bank. I was pleased by the welcome my colleagues extended to Paul Wolfowitz as the new President. Paul is an outstanding leader whose proven management skills, vision and commitment to development I believe can and will take the Bank and the international effort to promote development to a new level. We laid out some shared priorities today that we believe provide an ambitious agenda for the Bank.
Another key item on our agenda was fighting the financing of terrorism. We agreed on the importance of strengthening the process of multilateral asset freezing, in line with UN resolutions, improving information sharing, and exploring the possibility of broadening the application of new financialtools to disrupt all illicit activity.
Before closing, I want to note that I look forward to meeting later today with G7 Ministers and our counterparts from Russia and the Broader Middle East and North Africa. This is an important initiative that has generated promising energy. I expect that we will continue our constructive dialogue on how the G8/BMENA partnership can promote job creation, private investment, and economic prosperity.
Source: U.S. Treasury
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