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IMF issues broad call for U.S. financial prudence

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By Howard Schneider
Washington Post Staff Writer
Friday, July 9, 2010

Cut Social Security. Ditch the deduction for interest on home mortgages. Tax gasoline.

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The United States recently opened itself to the most intense scrutiny yet by the International Monetary Fund, and on Thursday was offered a bitter pill when the agency criticized some well-defended aspects of American culture -- cheap fuel, subsidized housing, and a government retirement check.

In a broad call for U.S. financial prudence, the agency also said the Obama administration was overestimating U.S. economic growth and needed to trim government deficits by hundreds of billions of additional dollars if its announced budget targets are to be met.

The recovery is going reasonably well in the United States, the IMF said, but some of the tougher decisions remain to keep it on track.

"The risks are tilted to the downside," David Robinson, deputy director of the IMF's Western Hemisphere department, said as he presented both the IMF's annual assessment of the U.S. economy and its first-ever review of the country's financial sector.

Combined, the reports will feed into a larger effort by the Group of 20 major nations to use peer pressure as a tool in repairing the damage from the recent financial crisis, with the IMF dishing out advice and the other members of the organization poised in judgment of one another's follow-through. The United States and China only recently agreed to let the IMF go beyond the broad economic survey performed annually on all members of the fund and undertake a more detailed review under the fund's Financial Sector Assessment Program. The two countries had been among the most notable of the fund's 187 members to refuse to participate in the financial sector study.

The analysis of China's financial sector is ongoing, and a date for the results has not been announced.

The U.S. reports outline a number of problems facing the American economy as it emerges from its worst economic downturn since the Great Depression -- lingering unemployment, a likely permanent loss of output, an expected wave of defaults on commercial real estate deals that could damage local and regional banks -- and include a long list of recommendations for U.S. officials and regulators.

The document did not go over well with the Obama administration, which has made a strong commitment to coordinate global economic policy within the G-20 and agreed with the other members at the recent meeting in Toronto to allow country-by-country "name and shame" reports to be submitted by the IMF when the group gathers for periodic summits.

Though the Federal Reserve and other U.S. analysts have started worrying themselves about the strength of the country's economic recovery, Obama said in a Midwest tour on Thursday: "What is absolutely clear is we're moving in the right direction; we're headed in the right direction."

An administration official said the IMF's conclusions were too harsh.

"Their economic projections over the next decade are overly pessimistic" and below what many independent analysts forecast, said a U.S. official who was not authorized to speak for the record. The Obama administration's budget for next year, for example, assumes economic growth of close to 4 percent, with growth above 4 percent in the years that follow. The IMF forecast U.S. growth of 2.9 percent in 2011 and slightly slower growth in subsequent years. The agency also assumes that the United States will have to pay slightly higher interest to borrow money in the future.

That's enough to make the difference between a public debt load that gradually stabilizes at about 70 percent of gross domestic product by 2015, and one that under the IMF's scenario would continue piling up and approach 100 percent of GDP by the end of the decade, a level many economists consider unsustainable.

To combat that possibility, the agency argues that the United States needs to move more aggressively to both cut spending and raise revenue, to the tune of $350 billion or more above what the administration now plans.

Its recommendations are similar to those made for other highly indebted nations in Europe -- countries such as France, Greece and Britain are all moving to reduce entitlement costs by increasing their national retirement age, for example -- but in a U.S. context may prove politically untenable.

Allowing homeowners to deduct their mortgage interest payments from their income taxes, for example, is a staple of U.S. housing policy, considered a way to make homeownership more affordable. The IMF came out harshly against the deduction, saying that it was part of a homeownership system that was "costly, inefficient and complex," did not demonstrably increase ownership rates compared with similar countries without the same tax incentives, and mostly benefited "the better-off."

"Each country is going to have to find the policies that work for that particular country and its values in finding the right fiscal path," said the administration official. "That is something the president's economics advisers are working on daily."


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