IMF tells US to remove ‘fiscal cliff’ uncertainty

The International Monetary Fund yesterday urged the US 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 US. The US economy is facing $4tn worth of expiring tax cuts and automatic government spending reductions, and most analysts do not expect Congress to act to soften the blow until after the congressional and presidential elections in November. “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. In addition to the looming budget tightening, the US is expected to hit the $16.4tn 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 Fund forecast economic growth in the US of 2% this year and cut its projection for 2013 to 2.25% from 2.4%. 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 does not act, the economy could contract early next year and annual growth could come in well below 1%, the IMF said. “We believe that fiscal consolidation is necessary but not just any fiscal consolidation. It has to be sensible and certainly not excessive,” Lagarde told a news conference. The Fund said that over the medium-term both revenue increases and reforms to government entitlement programs would be needed to help curb the growth in US debt. For now, however, it said the focus should be on fostering stronger growth. “Continued policy action is needed to boost the recovery,” Lagarde said. “We believe that the US authorities do not have a lot of space available — they have limited space actually — to act but they should use it to support the recovery.” The IMF said US monetary policy was appropriately “very accommodative” and emphasised that the Federal Reserve had room for further easing should economic conditions worsen. The US central bank has held overnight interest rates near zero since December 2008 and has bought $2.3tn in bonds in a further effort to lower borrowing costs. Last month it extended a programme to reweight its bond holdings toward longer-dated securities to push long-term interest rates lower. The Fed has said it is prepared to do more to spur a stronger recovery if needed and a raft of weak data has kept speculation alive that it might soon launch another round of bond purchases to lift the economy.