The International Monetary Fund expressed “significant concern” about the U.S. fiscal outlook as the deadline for automatic budget cuts approaches, advocating a more modest retrenchment to aid the economy.
Expiring U.S. tax provisions and automatic spending cuts mandated by the 2011 Budget Control Act imply fiscal withdrawal of more than 4 percent of gross domestic product, the Washington-based lender said today in its semi-annual Fiscal Monitor update.
“There is a risk in the United States of political gridlock that puts fiscal policy on autopilot and results in a sharp and sudden decline in deficits -- the ‘fiscal cliff,’” the IMF said.
Republicans in Congress are trying to exclude tax increases from congressional moves to tighten fiscal policy. They are demanding that any revenue raised by removing exemptions be used to reduce tax rates, rather than narrow the deficit.
The IMF, in its report, said the U.S. and Japan should try to widen their revenue bases by ending exemptions and unwarranted special treatment under the tax code rather than just raising taxes.
Advanced economy deficits will decline by about 0.75 percentage point of gross domestic product this year and 1 percent next year, “a rate that strikes a compromise between restoring fiscal sustainability and supporting growth,” the IMF said in today’s report. “However, continued focus on nominal deficit targets runs the risk of compelling excessive fiscal tightening if growth weakens,” it said.
Advanced economies will have a shortfall in 2012 of 5.8 percent of GDP and 4.7 percent in 2013, compared with 5.7 percent and 4.5 percent in the IMF’s April report. The fiscal gaps in Spain, a central player in Europe’s banking and debt crisis, are forecast to be 7 percent this year and 5.9 percent in 2013, compared with prior estimates for 6 percent and 5.7 percent, the IMF said.
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