IMF: U.S. needs to balance budget
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The IMF paper says it is still unclear if Bush's $1.7 trillion in tax cuts would do to boost the economy long term.
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WASHINGTON (CNN) -- The International Monetary Fund has called on the United States to balance its budget over the next five to 10 years, to help ease global imbalances.
It says the large fiscal deficit being run by the United States, while beneficial now in stimulating the U.S. economy, raises long-term domestic and global problems.
This year's expected fiscal deficit is $500 billion -- more than the GDP of South Korea or Australia.
In a report on U.S. fiscal policy released Wednesday, IMF economists say there is support for the view that increases in U.S. public debt can have "significant impacts" on global interest rates.
They say U.S. policymakers will need to lift taxes and cut spending to balance the federal budget, which has swung from a surplus of 2.5 percent of gross domestic product (GDP) in 2000 to a deficit of just under 4 percent in 2003.
"The deficit will be reduced by the cyclical expansion that is now under way, which will absorb spare capacity in the economy," Charles Collyns, deputy director of the IMF's Western Hemisphere Department, told reporters.
"But even assuming tight spending limits and a sharp rebound in revenues, this would still leave a deficit of around 2 percent of GDP with the economy operating at full capacity," he said.
"How to deal with this structural deficit undoubtedly will require both tax and spending initiatives," Collyns added.
The report said creating a "clear and credible framework" for eventually balancing the budget was key to avoiding a rise in interest rates that posed significant risks for the global economy.
It said while this could not be done overnight, it could be achieved over the next five to 10 years.
The report also points to the dangers posed by a "disorderly change" in global exchange rates. The dollar has been falling for weeks against major currencies, reaching record lows against the euro, a three-year low against the Japanese yen and a seven-year low against the Australian dollar.
Collyns said so far the weakening of the dollar had been "fairly orderly" in the sense that financial markets had not been substantially disrupted.
But he warned there was some risk that a disorderly and rapid move in exchange routes could have an impact on prices of U.S. assets and shares.
The large deficit in the U.S. current account -- the broadest measure of American trade with the rest of the world -- is also a cause for concern.
Collyns said there was a substantial risk that foreign investors' appetite for U.S. assets -- particularly government assets -- would diminish over time, adding to pressure on the dollar.
He said there was strong recent data for the U.S. economy, but the large fiscal deficit "remains a source of tension".
The IMF paper said moving the budget to balance would put the U.S. in a better position to deal with the massive fiscal pressures it will face as the baby boom generation starts to retire this decade, Reuters news agency reported.
"Without the cushion provided by earlier surpluses, there is less time to address these programs' underlying insolvency before government deficits and debt begin to increase unsustainably, making more urgent the need for meaningful reform," the report noted.
It said it was still an open question whether the $1.7 trillion in tax cuts won by President George W. Bush last year would do much to boost the economy long-term.
The Bush administration has contended that the 2003 round of tax cuts had played a major role in the recent acceleration in the recovery and would help the economy in the years ahead by giving it a "supply-side" boost.
The paper said U.S. fiscal policies had helped the recovery but the tax measures appeared to have only modestly shifted the tax burden from income to consumption.
