The International Monetary Fund warned the
United States against drastic cuts in its 2013 budget and said the
"tepid" recovery of the world's largest economy is endangered by the
Uncertainty over looming across-the-board automatic budget cutbacks, which will further erode growth if allowed to take effect, as well as the prospect of another major battle in Congress over raising the federal debt ceiling signals more trouble ahead, the IMF said in its periodic evaluation of the US economy.
IMF managing director Christine Lagarde emphasized her concern about the looming "fiscal cliff," as the next round of Congressional budget battles have been labeled in Washington.
She noted the dire consequences if the US cuts federal spending too quickly or gets bogged down in another partisan standoff over the debt ceiling. In August 2011, the US was brought to the brink of voluntary default as Republicans refused to allow more government borrowing without historic spending cuts.
"Avoiding excessive fiscal consolidation and promptly raising the debt ceiling are two policy actions that need to be held. The threat - only the threat - of a delay in raising the debt ceiling and of (reaching) the fiscal cliff could weaken growth already later this year," she said.
"And should (the threats) materialize because no agreement can be reached, the domestic effects would be severe with negative spillovers to the rest of the world."
Even without such dire developments, the IMF projected that weaker household spending, fiscal restraint and low global demand will keep growth to a modest 2 per cent in 2012 and 2.25 per cent in 2013.
Last week, the US government said the economy slowed in the first quarter to an annualized growth rate of 1.9 per cent, down from 3 per cent in the final quarter of 2011.
Lagarde said the potential deterioration in the eurozone posed additional risks to the US economy.
"Exposure to potential contagion from an intensification of the euro area debt crisis ... would be transmitted mainly via a generalized increase in risk aversion and lower asset prices, as well as transmission via the trade tunnel," Lagarde said.
But she was somewhat optimistic about the eurozone, saying that the decisions last week in Europe pointed the way to not only a banking union but also a fiscal union.
"Europeans are really attacking the roots of the issue," she said.
On the political front, the IMF said US lawmakers must reach an agreement by the end of the year on budget and debt-ceiling issues, which include the expiration of tax cuts enacted a decade ago.
The IMF reiterated that efforts to tackle the high US budget deficit will eventually require both spending controls and more revenue. The report noted that US tax revenues "are low relative to GDP, compared to other advanced economies," with many options including a paring back of the vast tax deductions and tax credits that disproportionately benefit high earners and corporations.
US President Barack Obama has been pushing for high earners to pay more, but conservative Republicans in Congress counter that any tax increase would be a blow to the fragile economy.
There is great "uncertainty because we don't know who is going to be making the decisions" next year, IMF chief of US mission Gian Maria Milesi-Ferretti told reporters after the press briefing.
The IMF urged the US to consider a value-added tax, similar those imposed in Europe, and carbon taxes.
President Barack Obama's budget proposals, based on a bipartisan agreement last summer on the debt ceiling, would reduce the government budget deficit by from 8.5 per cent of gross domestic product to 5.5 per cent. The IMF said that was too harsh and could reduce growth.
The IMF called for growth-friendly policies with spending on infrastructure, job training, housing initiatives and an extension of unemployment benefits.
The IMF pointed to "strong headwinds" in private consumption, the still depressed housing market, high unemployment, weaker business investment and tight credit for consumers as weighing on the US economy. Though exports have been a positive note, foreign demand in Europe has slowed, the report said.
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