IMF urges US to remove ‘fiscal cliff’ uncertainty

By Star Online: Business
5 July 2012

WASHINGTON: The International Monetary Fund (IMF) on Tuesday urged the United States to quickly remove the uncertainty over the path of fiscal policy, which is set to tighten abruptly at the start of next year without congressional action.

IMF managing director Christine Lagarde warned that just the threat of the “fiscal cliff” could weaken US economic growth later this year and she called for action to address it sooner rather than later.

She said the potential for a deterioration in the eurozone debt crisis was the other main risk facing the United States.

The US economy is facing US$4 trillion worth of expiring tax cuts and automatic government spending re-ductions, and most analysts do not expect Congress to act to soften the blow until after the congressional and presidential elections in Novem-ber.

“It is critical to remove the uncertainty created by the fiscal cliff' as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery,” the IMF said in its annual health check of the US economy.

The IMF statement comes at the end of annual economic consultations with authorities in the United States and is part of regular assessments of all of the fund's 188 member states.

Lagarde warned that the potential for a political showdown over the US budget and debt ceiling could shake confidence worldwide.

Last year, a fight over raising the debt limit undermined financial markets and was a factor in Standard and Poor's decision in August to yank the United States' top-tier AAA credit rating.

In addition to the looming budget tightening, the United States is expected to hit the US$16.4 trillion statutory limit on its debt sometime between the election and the end of the year. If Congress fails to raise it, it would lead to a US default.

Most analysts expect Congress to strike a post-election deal to avoid the “fiscal cliff” and buy time for lawmakers to work on a long-term budget and tax plan. But the uncertain outlook already appears to be weighing on business hiring and investment decisions.

The IMF forecast a modest 2% growth in the United States this year and shaved its projection for 2013 to 2.25% from 2.4% it forecast in April.

But it warned that the already modest forecast for next year could prove much too optimistic if Congress fails to relax the fiscal tightening of about 4% of gross domestic product contained in current law.

If Congress did not act, the economy could contract early next year and annual growth could come in well below 1%, the IMF said.

The IMF said that over the medium term both revenue increases and reforms to government entitlement programmes would be needed to help curb the growth in US debt.

For now, however, it said the focus should be on fostering stronger growth. Reuters

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