* U.S. and Japan must spell out budget-cutting plans now
* Fickle markets could turn; Europe's cuts on track
* U.S. postpones tightening in favor of tax cuts (Adds details from news conference)
By Lesley Wroughton
WASHINGTON, Jan 27 The United States and Japan urgently need to spell out plans for cutting their budget deficits before financial markets turn on them and force borrowing costs higher, the IMF warned on Thursday.
The stark warning came as rating agency Standard & Poor's cut Japan's long-term sovereign debt rating for the first time since 2002, and a day after a U.S. agency raised its 2011 budget deficit forecast by 40 percent. [ID:nL3E7CR0Q5] [ID:nN26141556]
In a report on global debt and deficits, the International Monetary Fund expressed concern that budget cutting in advanced economies with large debts was set to slow, and it pointed to the United States and Japan as laggards.
"In advanced economies where fiscal sustainability has not been a market concern, credible plans going well beyond 2011 need to be put in place urgently to lock in benevolent market sentiment," the IMF said in its "Fiscal Monitor" report.
"Renewed market pressures in some advanced economies demand that these countries underline their commitment to their deficit targets and devise contingency plans to ensure that adjustment goals are met," the IMF added.
The deepest global recession since the Great Depression forced rich countries to dig deep into their pockets to support their economies, pushing debt to record levels in some countries.
Some European nations have been forced to pay high interest rates on their debt for not keeping a better control on their finances, forcing governments to launch budget austerity plans. The IMF said earlier this week that Europe's debt crisis posed one of the gravest risks facing the global recovery.
In its latest report, the fund said large European countries will all tighten their budgets this year broadly in line with earlier plans, with Spain's cuts the largest.
But it said Europe needed a more comprehensive approach to crisis management to avoid spillovers and to "break the fiscal-financial spiral".
IMF Fiscal Affairs Department Director Carlo Cottarelli told reporters that markets at the moment were overestimating the risk of default or debt restructuring in Europe.
The IMF said new data showed advanced economies were making progress last year in cutting their debt loads. Deficits of rich countries declined to 8 percent of gross domestic product in 2010, a slight improvement over earlier IMF projections, the fund said.
However, new tax cuts in the United States and increased spending in Japan has delayed further progress.
Cottarelli said Japan needed to raise more revenue and he renewed a call for an increase in the value added tax.
As for the United States, the fund said Washington would need to make up for the delay by cutting more deeply in 2012. A deeper adjustment by the United States is needed for it to meet an ambitious G20 target of halving its budget deficit by 2013.
Cottarelli welcomed President Barack Obama's announcement this week of a five-year freeze in annual domestic spending. The White House estimates the freeze would cut the U.S. budget deficit by more than $400 billion over the next decade.
But Cottarelli stressed that Washington must be more specific about its plans to cut its budget deficit and lower public debt levels over the medium term. The Congressional Budget Office said on Wednesday the U.S. budget gap would widen to a record $1.48 trillion this fiscal year.
Asked about the IMF report, a White House official said Obama would lay out "a number of tough steps to tackle our fiscal situation" in a budget proposal next month. At the same time, top White House economist Austan Goolsbee said the government had to be careful not to undermine a fragile economic recovery. [ID:nWEN6389]
Pressed by a reporter on whether the United States was using the dollar's status as the world's reserve currency to avoid tough spending decisions, Cottarelli would only say fiscal consolidation was important to maintain U.S. credibility.
The United States holds a coveted top triple-A credit rating from all three rating agencies, although Moody's warned last month a the swelling deficit would move it a step closer to a downgrade in the coming two years.
EMERGING MARKET WARNING
In a warning to emerging markets, the IMF said fiscal balances in Brazil, China and India were weaker than the IMF projected in November, noting a deterioration in Brazil's fiscal accounts was "particularly pronounced."
"For Brazil I don't think there is any immediate risk," Cottarelli said, but there is a concern amid increased capital inflows and easy credit conditions in emerging economies that governments were spending the increased revenues.
"Many emerging economies need to rebuild fiscal buffers more rapidly to address overheating concerns; create scope to respond to any growth slowdown; or avoid relapsing into pro-cyclical policies that would undermine credibility," the IMF said. (Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)