The International Monetary Fund said today it is urgent for the U.S. Congress to approve an increase in the $14.3 trillion debt ceiling.
Republicans and Democrats are preparing rival debt-ceiling plans after they were unable to break a partisan stalemate over the weekend. The Treasury Department says U.S. borrowing authority will end on Aug. 2 unless Congress acts.
The 24-member IMF board “highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation plan,” according to an IMF statement on the U.S. economy. “With a well-defined, credible multiyear framework in place, the pace of deficit reduction in the short run could be more attuned to cyclical conditions.”
“The deficit reduction plan will need to include both changes to entitlement programs and revenue-enhancing measures,” the staff of the Washington-based lender said in a separate report on the U.S. The staff also said a fiscal strategy can include savings in health care and “reducing tax expenditures.”
Unfavorable fiscal outcomes “could take the form of a sudden increase in interest rates and-or a sovereign downgrade if an agreement on medium-term consolidation does not materialize or the debt ceiling is not raised soon enough,” the IMF staff said. “These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets.”
“Directors agreed that placing public debt on a sustainable path is critical to the stability of the U.S. economy, with positive spillovers to other countries,” the IMF statement said.
Overall, the lender said the U.S. outlook is for “sluggish private domestic demand” while the unemployment rate “has declined only modestly from its recent peak.” The jobless rate was 9.2 percent in June, down from 10.1 percent in October 2009.
The IMF staff said it is projecting U.S. growth of between 2.75 percent and 3 percent “from 2012 onwards.” The IMF, in an update to its World Economic Outlook released in June, said it expected the U.S. economy to grow 2.7 percent next year.
“A number of directors cautioned that the extraordinarily low level of interest rates in the United States may have encouraged excessive risk-taking, affected cross-border capital flows, and added to global inflationary pressures,” the IMF said in today’s statement, which accompanies the lender’s annual review of the U.S. economy.
The IMF said “U.S. spillovers on growth abroad are uniquely large, mainly reflecting the pivotal role of U.S. markets in global asset price discovery.”
“Spillovers from credible and gradual fiscal consolidation are limited and ambiguously signed, while those from the tail risk of a potential loss of confidence in U.S. debt sustainability are universally large and negative,” the IMF said.
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