IMF warns US against cutting deficit too fast

The International Monetary Fund on Tuesday pared its growth forecast for the US economy and warned that the Obama administration could be slicing the deficit too fast for the weak economy. It also said the country's "tepid" recovery was under threat from the pre-programmed "fiscal cliff" combination of sharp spending cuts and tax increases at the year-end, and a worsening of the eurozone debt crisis. The IMF estimated 2012 US economic growth at a 2.0 percent, down from April's forecast of 2.1 percent, citing sluggish consumer spending, the key driver of gross domestic product activity. But even that outlook was at risk both from the domestic political stalemate and deepening international economic challenges, the global crisis lender said. "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 annual report on the US economy. IMF managing director Christine Lagarde, speaking at a news conference, highlighted the risks to the global economy of US political inaction on the looming domestic challenges. "The domestic effect would be severe, with negative spillovers to the rest of the world," Lagarde said. She said the threat of the fiscal cliff and the debt ceiling not being moved has eroded confidence in the country. The fiscal cliff is the result of Congress's failure to agree on a deficit reduction plan, resulting in mandated tax increases and spending cuts to take effect by January 1, 2013. Congress remains deadlocked over how to avoid the mandated measures, and the political impasse was not expected to end before the November 6 presidential election. The IMF warned that leaving the measures to take effect could force a US contraction early next year, slamming an already fragile world economy. It noted the nation's debt ceiling will need to be raised in early 2013, after a historic battle over the same issue in Congress last year roiled markets and cost the United States its coveted triple-A debt rating for the first time.  The looming need for the limit hike was "bringing back the risk of heightened uncertainty and financial market disruption," the Washington-based institution said, calling it to be lifted as soon as possible. The IMF criticized President Barack Obama's proposed fiscal 2013 budget, which calls for slashing the nation's deficit by three percentage points to about 5.5 percent of gross domestic product. Even if as expected the deficit cutting is less than three points, the IMF warned that "this smaller reduction would be too rapid, given the weak economy." "The composition of spending should be as growth-friendly as possible," the IMF said, suggesting a larger deficit of about 6.25 percent of GDP would be appropriate. It called for spending on infrastructure, measures to ease the housing crisis, and worker training programs in the distressed labor market, where job growth has nearly stalled and the unemployment rate is at 8.2 percent. The global lender cited risks to US growth, including the limited room for monetary policy to counter the drag of deficit cutting and an erosion of skills in the labor market. But the IMF emphasized that weak consumer spending, which accounts for about 70 percent of the economy, remained a key obstacle to recovery three years after the Great Recession. "Consumption is expected to be held back by households continuing to repair their balance sheets amid a sluggish recovery of house prices" after the housing bubble collapsed six years ago.