April 12, 2011 / 2:03 PM / in 7 years

IMF urges U.S. to move faster to cut budget gap

WASHINGTON (Reuters) - The International Monetary Fund on Tuesday urged the United States to outline credible measures to reduce its budget deficit, pressuring the White House to detail plans to ratchet down record debt levels.

President Barack Obama on Wednesday will offer proposals for reducing the nation’s debt, aiming to seize the high ground in a debate over how best to cut red ink. Republican lawmakers are pushing for deep spending cuts in return for agreeing to raise a limit on the nation’s ability to borrow.

The IMF said “a major” adjustment will be needed in the United States next year to put the budget back on track.

“Market concerns about sustainability remain subdued in the United States, but a further delay of action could be fiscally costly, with deficit increases exacerbated by rising (bond) yields,” the IMF said in its “Fiscal Monitor” report.

The IMF noted that while most advanced economies were taking steps to rein in budget gaps, Japan and the United States -- two of world’s largest economies -- have delayed action to nurse their recoveries.

In January, the IMF had issued a stark warning to both Washington and Tokyo to tackle their debts before markets lost patience and dumped their bonds. Its latest report offered Japan a reprieve in light of the country’s devastating earthquake.

The fund said Japan should spell out medium-term fiscal plans as soon as earthquake rebuilding costs become clearer. Japanese authorities said on Tuesday the economic damage from the massive earthquake and tsunami last month is likely to be worse than first thought.

“Countries delaying adjustment in 2011 will face more significant challenges to meet their medium-term objectives,” the IMF cautioned.


U.S. lawmakers reached a last-minute deal on Friday to avoid a government shutdown when they agreed to $38 billion in spending cuts. Now, with the United States about to hit the $14.3 trillion limit on its borrowing authority, the stakes are even higher because of the risk of potential default.

Debt levels in developed nations rose dramatically during the 2007-2009 financial crisis as governments sought to prop up sinking economies and bail out banks.

The U.S. budget gap is on track to hit $1.4 trillion this year, or 9.3 percent of gross domestic product.

The Obama administration had warned against tightening the budget too precipitously for risk of derailing a fragile recovery, but now the economy looks to be strengthening and political pressure is mounting to address the red ink.

The IMF expressed concern that upcoming elections in the United States, France and Japan could complicate policy efforts needed to lower debt levels.

The fund said the biggest fiscal burden in advanced economies will come from spending on pensions and health care.

New projections by IMF staff suggest annual spending on public health will rise by an average of 3 percentage points of GDP in advanced economies over the next two decades, with an increase of 5 percent of GDP in the United States and 2 percent on average in Europe.


In emerging market economies, where the IMF sees threats from higher oil prices and inflation, deficits are likely to come down further this year. However, the fund warned that higher food and fuel prices could slow the pace of spending cuts.

Oil exporters are expected to show sharper declines in their deficits, the IMF said. Oil prices rose to above $126 a barrel last week but eased to about $124 on Tuesday.

Meanwhile, in the Middle East, widespread protests in countries such as Tunisia, Egypt, Yemen, Jordan, Bahrain and Syria are likely to fuel an increase in spending on subsidies to ease social pressures from higher oil and food prices.

Such steps will widen deficits across the region, the IMF said.

Editing by Neil Stempleman and Leslie Adler

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