International Monetary Fund official Carlo Cottarelli said the U.S. needs a medium-term plan to reduce its budget deficit as the danger of the biggest fiscal tightening in more than six decades threatens economic growth.
“Without additional support, there will be a fiscal tightening next year of about 4 percent of GDP, which is the largest adjustment seen on record since, I believe, 1947,” Cottarelli, director of the IMF’s fiscal affairs department, said in an interview with Bloomberg Television’s Sara Eisen in Tokyo today. “This will be very negative and very bad for the U.S. economy.”
The IMF released forecasts today which predict a smaller narrowing of the deficit on the assumption that a political compromise will be reached. Cottarelli’s comments echo those of other fund officials including Managing Director Christine Lagarde, who told CBS on Oct. 1 that the U.S. may face a recession next year if Congress doesn’t avert the so-called fiscal cliff of automatic spending cuts and tax increases.
“At present, the U.S. has a lot of credibility, the U.S. government has a lot of credibility, the fiscal account doesn’t yet suffer from this correction, but this will not last for ever,” Cotarelli said. “So there is a need for a plan. A plan that clarifies how the debt will be first stabilized in relation to GDP and then brought down.”
The IMF said today in Tokyo that there remains a lack of clear fiscal policies in the U.S. and Japan to tackle large public imbalances at an “appropriately sustained pace.” The fund forecasts the U.S. shortfall will narrow to 8.7 percent of gross domestic product in 2012 and 7.3 percent next year based on the assumption of a political compromise to avoid the fiscal cliff.
Cottarelli said that the economy could contract if such a deal isn’t reached.
“It would essentially imply that there would be no growth next year in the U.S. economy, or that GDP may even decline,” he said.
In its World Economic Outlook today, the IMF said the global economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year. That compares with July predictions of 3.5 percent and 3.9 percent. It said the euro area will contract 0.4 percent this year and grow 0.2 percent in 2013.
IMF Chief Economist Olivier Blanchard said that while the probability of a global recession is currently “relatively small,” that risk might become “substantial” if the worst-case scenario regarding either the U.S. fiscal cliff or the euro area were to materialize.
“There’s a lot of uncertainty about fiscal policy in the U.S., about what happens in the euro,” Blanchard said in a television interview in Tokyo. “If things go wrong, it could be very bad.”