Saturday, July 31, 2010

Tackle the debt - IMF tells US

THE International Monetary Fund has called on the US to take "decisive policy action" to bring its government debt under control, warning that it is on track to be almost 100 per cent of GDP by 2020.

In its annual report on the US, released last night, the IMF said the Obama administration and Congress needed to go further to tackle the budget deficit which IMF staff estimate will be between 5 and 8 per cent every year over the next decade.

The IMF's board of directors made it clear that both tax rises a taboo for Republicans and spending cuts would be needed to bring the US budget back anywhere near balance, let alone into surplus.

"A larger than budgeted adjustment would be required to stabilise debt to GDP under the staff's economic assumption, requiring revenue and expenditure measures," it said.

It urged reform of entitlements, such as farm subsidies, pensions and benefits. It also urged the US to aim to cut its debt-to-GDP ratio over the longer term. The US has run just one budget surplus in the past 50 years.

A separate report by IMF staff estimates the deficit this year will be 11 per cent of GDP (compared with 3 to 4 per cent in Australia). That is forecast to halve by 2012, but then rise as the ageing population and soaring health and debt costs inflate spending.

The report tips the 10-year bond rate to average 3.6 per cent this year, but then jump to 5.9 per cent by 2012, and to 6.5 per cent thereafter.

The staff estimate that gross government debt will be larger than the US GDP by 2012.

"The mission saw a key macro-economic challenge as ensuring that public debt is put and is seen to be put on a sustainable path, without jeopardising the recovery," the staff report said.

"Under current policies, federal debt held by the public could rise from 64 per cent to 95 per cent of GDP by 2020."

It suggests most of this will need to be bought by domestic investors, with foreign investors likely to unwind their holdings.

"Over the medium term, higher real interest rates will be needed to encourage the implied portfolio shifts," the report said.

The report lays bare clear disagreements between the IMF team and the US authorities over prospects for the US economy, and hence for returning the budget to some form of sustainability.

In Melbourne yesterday, Harvard historian Niall Ferguson warned that competition between a rising China and a fiscally weakened US could lead to conflict.