* G20 countries seeking more flexibility on budget targets
* Concerns about possible U.S. tax hikes and spending cuts
* Talks on new targets to continue in early 2013
By Louise Egan and Julien Toyer
MEXICO CITY, Nov 5 The world's leading economies
will give themselves more wiggle room to meet targets for
cutting budget deficits rather than risk aggravating a slowdown
in many countries chief among them the United States.
Meeting a day before the U.S. presidential election, the
Group of 20 countries worried that their target to cut in half
the budget shortfalls of advanced economies by the end of next
year might hurt the struggling global economy.
"We will ensure the pace of fiscal consolidation is
appropriate to support growth," said a draft communique, drawn
up for top G20 finance officials meeting in Mexico.
The target for cutting deficits was agreed by G20 leaders at
a summit in Toronto in 2010, when the global economy seemed to
be on the road to recovery from the devastating financial crisis
in the previous two years.
It now looks out of reach for some economies, including the
United States, as growth has slowed.
The U.S. budget gap surpassed $1 trillion for the fourth
year in a row in the fiscal year 2012. The deficit was
equivalent to 7.0 percent of the country's economic output.
While the United States needs to bring its deficits under
control, G20 countries also want it to avert a barrage of tax
hikes and spending cuts from Jan. 1. They were penciled in last
year to show Washington could tackle its fiscal problems.
Those measures, dubbed a "fiscal cliff", could tip the U.S.
economy back into recession unless Congress cuts a deal quickly
after the presidential and congressional elections on Tuesday.
"There may have to be some modification with respect to the
deficit targets," said Canada's finance minister, Jim Flaherty.
"That may not be compatible for the Americans with their
fiscal cliff solution, whatever it is, so there may have to be
more time there," he told reporters, stressing countries need to
show they can eventually fix their fiscal problems over time.
A European official said the flexibility could alternatively
come in the form of less rigid definitions of what constitutes a
public deficit, such as allowing some countries to exclude the
costs of recession - higher unemployment and welfare costs and
lower tax revenues - on their public accounts.
Other top policymakers said the emphasis in the talks in
Mexico City was on ways to boost demand in their economies.
"The dominant focus in the discussion among the ministers
and governors was the imperative of supporting demand. There was
broad agreement that this requires different things from
different members of the G20," one of the policymakers said.
The draft communique said G20 members would ensure that
public finances are on "a sustainable path" and in line with the
medium-term commitments made in 2010. At the Toronto summit, G20
leaders pledged to stabilize public debt by 2016 in most
advanced economies as well as cutting budget deficits.
Countries like the United States, Britain and Japan are
struggling to meet those deficit targets. As economies remain
weak, there is little appetite for heavy spending cuts.
Big European countries, which have done better at tightening
their belts, are now leading the way in pressing the United
States to steer away from the fiscal cliff, which many see as
the biggest short-term threat to global growth.
A TICKING CLOCK
"The clock is ticking, the cliff is getting closer and
closer. It is a question of less than two months and accidents
can happen," a senior G20 official said before adding the group
is confident the U.S. Congress will find a bi-partisan solution.
Chile's finance minister, Felipe Larrain, also said there
was an assumption that a deal would be found.
"If we're not able to resolve the cliff, that could be the
tipping point for a much more complicated scenario in the world
economy," he told Reuters.
The draft G20 communique said the United States "will
carefully calibrate the pace of fiscal tightening to ensure that
public finances are placed on a sustainable long-term path while
avoiding a sharp fiscal contraction in 2013."
A senior European official attending the two-day meeting
said the G20 would aim to complete new targets when the group's
policy makers next meet in Moscow in February.
The G20's consensus of four years ago, which helped stave
off the risk of a new depression, has given way to persistent
differences over issues such as spending to boost growth and the
right pace of belt-tightening to tackle high debt levels.
The global economy faces "elevated" risks, including
Europe's debt crisis - centered on Spain and Greece - and
potential problems in Japan, the draft communique said.
"Global growth remains modest and downside risks are still
elevated, including due to possible delays in the complex
implementation of recent policy announcements in Europe, a
potential sharp fiscal tightening in the United States, securing
funding for this year's budget in Japan, weaker growth in some
emerging markets," the draft communique said.
The wording on Europe referred to differences within the
euro zone over how to build a banking union, considered an
important way to bolster the bloc's shaky financial system,
The group will also recommit to implementing tough new bank
capital rules on time. The rules, known as Basel III, are the
world's response to the financial crisis and are set to be
phased in starting in January.
U.S. and European regulators have not yet finalized their
versions of the rules, which had prompted speculation that the
timetable could be pushed forward.
Few expected major agreements in Mexico with heavyweights
such as U.S. Treasury Secretary Timothy Geithner, European
Central Bank chief Mario Draghi and top Chinese officials all
skipping the meeting. Geithner is expected to stand down after
the U.S. election, even if President Barack Obama is re-elected.
The final communique will be released later on Monday.