IMF warns: ‘Fiscal cliff’ of tax hikes, spending cuts puts U.S. economy at risk

The United States could be pushed back into recession if automatic tax hikes and spending cuts take effect next year as scheduled, a potentially devastating blow to the world economy, the International Monetary Fund warned on Tuesday.

In its annual review of the U.S. economy, the fund added its weight to the growing chorus of analysts and others worried that political deadlock might lead the nation into an economic disaster.

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The IMF forecasts the U.S. economy will grow 2 percent this year and 2.3 percent in 2013, roughly in line with forecasts by the Federal Reserve and private economists.

The IMF forecasts the U.S. economy will grow 2 percent this year and 2.3 percent in 2013, roughly in line with forecasts by the Federal Reserve and private economists.

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Unless Congress and the Obama administration agree on alternatives, a set of tax cuts, most of them dating to the George W. Bush administration, will expire next year. A series of automatic budget cuts would also take effect under a separate law.

The combined drag would equal about 4 percent of the nation’s annual economic output, leaving the economy stuck in neutral and perhaps even contracting.

“Failure to reach an agreement on near-term tax and spending policies would trigger a severe fiscal tightening . . . with negative growth early next year and significant negative repercussions on an already fragile world economy,” the fund reported.

After months in which the IMF has cited Europe’s problems as a chief global risk, Tuesday’s report focused on the quandary facing the world’s largest economy: how to curb a massive run-up in debt without stifling economic growth that the fund already considers “tepid.”

The fund on Tuesday lowered its estimate of U.S. growth for this year and next, forecasting the economy to expand by 2 percent this year compared with the 2.1 percent growth rate it projected in April. That adds to concerns about the slowing global economy, with several euro-zone countries mired in recession and emerging giants such as China and India cooling from the high rates of growth that had helped buoy the world’s outlook.

In a news conference Tuesday, IMF Managing Director Christine Lagarde said that despite high levels of debt, U.S. policymakers still have room to spend more on infrastructure, worker training programs and other efforts to keep short-term growth on track.

The fund consults with national leaders in preparing its annual reviews, and the recommendations offered by the IMF jibe closely with those made by the Obama administration. Specifically, the fund recommended that the United States slow its budget-cutting in the short run, allowing slightly larger government deficits in order to spend an additional $100 billion or more on a variety of programs.

“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.”

U.S. officials had no comment on the IMF report.

Europe continues to pose risks to the U.S. financial situation, the IMF said. If the euro zone’s financial crisis intensifies, it could threaten to cramp U.S. exports and trigger broader problems.

But with the United States approaching what has been deemed a “fiscal cliff,” the fund urged U.S. officials to “decisively tackle” the country’s problems. Along with agreement over extending the tax cuts and slowing any spending reductions, the IMF said, the country needs to raise the debt ceiling “promptly” and secure the Social Security system by increasing taxes over time and raising the retirement age.

Social Security and spending on other entitlement programs is a longer-term issue, but the fund said the upcoming debate over the debt ceiling — likely to occur after the election — could upend markets.

“The threat — only the threat of delay — in raising the debt ceiling could weaken growth already,” Lagarde said, if world debt markets become concerned about the ability of the United States to sustain its rising debt levels.

 
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