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The US lacks a “credible strategy” to stabilise its mounting public debt posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.
In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.
To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.
Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences ... for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”
At the moment, the US has outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. “More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation,” the IMF said.
The IMF said the US economy “appears sufficiently strong” to withstand greater austerity measures and tax increases, adding that the benefit of last year’s stimulus package “is likely to be low relative to its costs”.