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The International Monetary Fund (IMF) today 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 that the economy 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 Euro zone crisis.
The IMF estimated US economic growth in 2012 at 2.0 per cent, down from April’s forecast of 2.1 per cent, and said even that outlook was at risk from both domestic and international threats.
“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 IMF said in its annual report on the US economy.
The fiscal cliff is the result of Congress’ failure to agree on a deficit reduction plan, resulting in mandated tax increases and spending cuts to take effect by January 1, 2013.
But Congress remains deadlocked over how to change the law that mandates the fiscal cliff measures.
The IMF criticised President Barack Obama’s proposed fiscal 2013 budget, which calls for slashing the nation’s deficit by three percentage points to about 5.5 per cent 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 that a larger deficit of about 6.25 per cent of GDP would be appropriate.
The global lender cited a litany of risks to US growth, including “the limited room for monetary policy to offset the fiscal drag” amid the Federal Reserve’s long-running support of ultra-low interest rates and other stimulus.
The distressed labour market could also be further battered if the economy falters, saying there was a “risk that prolonged economic slack could reduce potential output through skill erosion” and the exit of discouraged workers from the labour force.
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