US Lacks Credibility on Debt – IMF

The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.

The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt.

To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said.

In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences… for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

At the moment, the US had outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. “More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation,” the IMF said.

The IMF said the US economy “appears sufficiently strong” to withstand greater austerity measures and tax increases, adding that the benefit of last year’s stimulus package “is likely to be low relative to its costs”.

Having narrowly averted a government shutdown last week through a deal with congressional Republicans to cut $38.5bn in spending from this year’s budget, Mr Obama will on Wednesday unveil his plans to rein in America’s long-term deficits, which are driven by popular programmes like Medicare, Medicaid and social security.

The debate over US fiscal policy is expected to intensify in the coming weeks and months, as the US hits its congressionally mandated debt limit of $14,300bn. Without approval by lawmakers to increase it, the US could face potential default as early as July, and so far Republicans and Democrats remain some distance from reaching a deal.