WASHINGTON – The International Monetary Fund on Monday urged the US to begin addressing its yawning budget deficit this year rather than putting off the pain and missing G20 fiscal targets.
In its semi-annual measure of global economic health, the IMF said the US will likely grow more slowly than originally forecast in January -- 2.75 percent instead of 3.0 percent.
It said that slack domestic demand, high unemployment and still-depressed housing prices will continue to dog the world's largest economy, and that the huge government deficit will limit its ability to address those problems.
Even so, the IMF, echoing the ongoing battle in the US Congress over taxes and government spending, urged Washington not to try to borrow and spend its way back to economic health.
With a federal budget gap estimated at 10.8 percent this year, it said Washington will find it difficult to achieve its Group of 20 goal of halving the deficit between 2010 and 2013.
"The United States stands out as the only large advanced economy where the cyclically adjusted fiscal deficit is expected to increase in 2011 compared with 2010 despite the ongoing economic recovery," the Fund said in the World Economic Outlook.
Addressing this "urgently" is important to avoid excessive US borrowing destabilizing global bond markets, it said.
The United States needs to squeeze more growth out of exports rather than domestic consumption, long the key driver of the economy, it added.
The report was released just days after a last-minute deal between Republicans and Democrats over spending prevented a shutdown of the government.
The two sides agreed late Friday on $38.5 billion in new cuts to the current year's budget -- a small but politically symbolic bow to those who view the deficit a bigger problem than slow growth and unemployment.
But nothing was done to increase government revenues -- an issue that will be in focus later this week when President Barack Obama releases his fiscal 2012 budget proposal.
The IMF was cautious in predicting US growth, moving its own forecast for 2011 closer to the Obama administration's conservative estimate of 2.7 percent made in February.
It forecast a slightly faster pace for 2012 of 2.9 percent.
Pointing to a central political challenge for the Obama administration, it suggested that even with some recovery and continued deficit spending, unemployment will remain at a high 7.75 percent in 2012, compared with 8.8 percent currently.
The government's fiscal stimulus last year, which included more spending and a range of tax cuts and benefits, had had a minimal impact on growth, but likely had the important impact of eliminating the threat of deflation, according to the Fund.
But it said now was the time to begin reducing the deficit, not let it grow.
"What we have observed is there has been a significant loosening of policies in 2011," Jorg Decressin, a senior researcher at the IMF, told reporters Monday.
"And that makes attainment of the objective for 2013 much more difficult, because it will require a large fiscal withdrawal over 2012-2013."
Natalie Wyeth, a US Treasury Department spokeswoman, said that Washington still would meet the goals laid out in a meeting of leading economies in Canada last June.
"We will meet our commitments to the G20 in Toronto and look forward to working with Congress to establish a credible, multi-year path to ensure our fiscal sustainability while delivering strong economic growth," she said in a statement.
The IMF made no specific recommendations, but endorsed generally the "many useful ideas" of the US bipartisan fiscal-deficit commission report released in February.
Still, it gave no hint as to its preference in the report's mix of spending cuts and tax hike proposals -- the issues at the center of the US political divide.
It said though that Obama's own sizable spending reduction plans "will be challenging to implement, especially in an environment of weak growth and elevated unemployment."