NEW YORK (Reuters) - The economy shows encouraging signs of early expansion but still faces tough challenges that call for measures to create jobs to help restore fiscal sustainability, Treasury Secretary Timothy Geithner said on Thursday.
In prepared remarks for delivery to the Economic Club of New York, Geithner said the economy was now more productive than it was before the 2007-2009 financial crisis but said confidence remains fragile.
"That is why it is so important that policy makers continue to work to get the economy growing faster in the short term and not shift prematurely to fiscal restraint," he said.
"We can't cut our way to growth. Severe austerity now would be very damaging," he added.
Geithner noted that at the end of 2012, the country faces a simultaneous expiry of tax cuts and big across-the-board spending cuts that together would amount to about five percent of the country's gross domestic product.
The prospect of such a blow to national output should be a strong incentive for lawmakers to reach some compromises on taxes and spending, he suggested.
Geithner said the Obama administration is aiming for a package of measures that includes some tax increases for wealthy Americans, though that is opposed by Republicans.
"If you do not raise revenues through tax reform, then you have to find another 1 percent of GDP or roughly 1.5 trillion dollars over 10 years in additional savings from defense, Social Security, Medicare, education or low income programs," he said.
Geithner noted that research shows that recoveries that follow financial crises tended to be "more tentative and uneven" and said it likely will take years to fully repair damage caused by the last one.
At the same time, the administration must try to prepare for a future in which emerging-market countries like Mexico, China and Brazil are getting better at competing and are putting pressure on American jobs.
One way to do that is by reforming a corporate tax system that Geithner described as "a complex and unfair mess of subsidies...with a very high statutory rate" of tax that varies across industries. It needs to be reformed to encourage U.S. businesses to keep production at home, he suggested.
Geithner has previously indicated that he is staying in the Obama administration through this year's elections but, even if President Barack Obama is reelected, would not be back in a second term.
He said the country can't let up on the effort to reduce deficits and said Americans should beware of promises that tax cuts can pay for themselves.
"No responsible politician can offer the nation fiscal sustainability through trillions in unpaid-for tax cuts," Geithner added.
Reporting By Glenn Somerville; Editing by Diane Craft