IMF urges US to address debt now

Debt clock/Wikimedia image

AFP

WASHINGTON (AFP) – The International Monetary Fund on Monday urged the US to begin addressing its yawning budget deficit this year rather than putting off the pain and missing G20 fiscal targets.

In its semi-annual measure of global economic health, the IMF said the US will likely grow more slowly than originally forecast in January — 2.75 percent instead of 3.0 percent.

It said that slack domestic demand, high unemployment and still-depressed housing prices will continue to dog the world’s largest economy, and that the huge government deficit will limit its ability to address those problems.

Even so, the IMF, echoing the ongoing battle in the US Congress over taxes and government spending, urged Washington not to try to borrow more and spend its way back to economic health.

In a last-minute deal that prevented a shutdown of the government, Republicans and Democrats late Friday agreed on $38.5 billion in new cuts to the current year’s budget — a small but politically symbolic bow to those who view the deficit a bigger problem than slow growth and unemployment.

“The United States stands out as the only large advanced economy where the cyclically adjusted fiscal deficit is expected to increase in 2011 compared with 2010 despite the ongoing economic recovery,” the IMF said in the World Economic Outlook.

Addressing this “urgently” is important to avoid excessive US borrowing destabilizing global bond markets, it said.

This year’s federal budget gap will already make it difficult for Washington to achieve its G20 goal of halving its deficit between 2010 and 2013, the IMF said.

The IMF’s assessment of US growth prospects for 2011 moved closer to the Barack Obama administration’s conservative estimate of 2.7 percent in February.

But it forecast a faster pace for 2012 of 3.0 percent.

The government’s fiscal stimulus last year, which included a range of tax cuts and benefits, had had a minimal impact on growth, but likely had the important impact of eliminating the threat of deflation, the Fund saw.

Pointing to a central political challenge to the Obama government, it suggested that even with some recovery and continued deficit spending, unemployment will remain at a high 7.75 percent in 2012, compared to 8.8 percent currently.

The IMF made no specific recommendations, but endorsed generally the “many useful ideas” of the bipartisan fiscal deficit commission report released in February.

Still, it gave no hint as its preference in the report’s mix of spending cuts and tax hike proposals — the issues at the center of the US political divide.

It said though that Obama’s own sizable spending reduction plans “will be challenging to implement, especially in an environment of weak growth and elevated unemployment.”

© AFP — Published at Activist Post with license