IMF: U.S. could fall off 'fiscal cliff'

Updated July 4, 2012 at 9:51 AM
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WASHINGTON, July 4 (UPI) -- The U.S. economy could be pushed off a "cliff" if Washington lets Bush-era tax cuts expire and forced spending cuts begin, the International Monetary Fund said.

If the tax increases and mandatory spending cuts -- worth as much as 4 percent of gross domestic product -- are allowed to kick in as scheduled Jan. 1, 2013, the sudden shock could be enough to put the country back into recession, and possibly even contract, with global repercussions, the fund said in its annual U.S. economic review.

Analysts said the dire forecast agreed with a growing chorus of analysts and others, including Federal Reserve Chairman Ben Bernanke, who warn political deadlock on Capitol Hill could lead the nation into an economic disaster, The Washington Post said.

The Bush-era tax cuts refer to tax-code changes passed during the George W. Bush administration that generally lowered tax rates and revised the U.S. tax code. They are set to expire Dec. 31, along with a temporary payroll-tax holiday sought by President Barack Obama.

The mandatory spending cuts are part of a deal that ended a U.S. debt-ceiling crisis that threatened to lead the United States into sovereign default around Aug. 3, 2011. The deal stipulates if Congress fails to produce a deficit-reduction bill with at least $1.2 trillion in cuts, it can grant a $1.2 trillion increase in the debt ceiling but the action would trigger $1.2 trillion in across-the-board spending cuts split equally between defense and non-defense programs.

Fund Managing Director Christine Lagarde told reporters Tuesday Congress should "promptly" raise the debt ceiling to avoid spooking the global markets and possibly raising the country's borrowing costs.

"The threat -- only the threat -- of a delay in raising the debt ceiling ... could weaken growth already later this year" if world debt markets become concerned about the ability of the United States to sustain its rising debt levels, Lagarde said.

The government is expected to hit its statutory borrowing limit late this year.

"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 fund said in its report.

The fund cut its U.S. growth estimates to 2 percent for this year and 2.25 percent for 2013. In April, it estimated 2.1 percent growth for this year and 2.4 percent for 2013.

Other government forecasters have also lowered estimates recently.

The Federal Reserve lowered its 2012 growth estimate last month to a range of 1.9 percent to 2.4 percent, down from a 2.4 percent to 2.9 percent range it projected in April.

The IMF warned of "downside risks" from a protracted eurozone crisis, and warned of "a very large fiscal adjustment in 2013" if the "tepid" U.S. recovery doesn't continue this year.

Lagarde said that despite high U.S. debt levels, policymakers should still increase spending on infrastructure, worker-training programs and other efforts to keep short-term growth on track.

Specifically, she said the fund recommended Washington slow its budget-cutting in the short run by spending an additional $100 billion or more on a variety of programs, even if that leads to slightly larger temporary government deficits.

"U.S. authorities do not have a lot of space available ... but they should use it to support the recovery in the near term," Lagarde said.

Efforts to trim the federal deficit have "to be sensible and certainly not excessive."

"A small deficit reduction for 2013," which Lagarde said was about 1 percent of GDP, "would be perfectly appropriate," she said.

Democratic and Republican U.S. officials had no immediate comment on the IMF report.

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