US lacks credible stability plan - IMF

THE US lacks a “credible strategy” to stabilise its mounting public debt posing a small but significant risk of a new global economic crisis, says the International Monetary Fund (IMF).

Its fiscal monitor, released yesterday, also foresees little cheer in the short-term for Portugal and continues to question Irish deficit targets.

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.

The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt.

To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said.

In its twice-yearly fiscal monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

Carlo Cottarelli, head of fiscal affairs at the fund, said: “It is a risk that if it materialises would have very important consequences . . . for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

The IMF’s gloomy forecast for the Portuguese economy sets the tone for talks on an €80 billion bailout that has revived painful memories of two previous crises when the country was forced to seek IMF aid.

European Union, European Central Bank and IMF officials began negotiations on the terms of the rescue programme in Lisbon on Tuesday as the Washington-based fund projected that Portugal would be the only developed country to suffer a recession next year, with output declining by 0.5 per cent after a fall of 1.5 per cent in 2011.

In relation to Ireland, the reports says Ireland’s fiscal deficit this year will be 10.8 per cent, 0.8 per cent above the Government’s medium-term plan. It says the increase “reflects financial sector support operations”.

In terms of general government deficit, the report reiterates the IMF view that the Government will miss the 2015 target of 3 per cent set out in the programme for government.

The IMF says that, in 2015, the deficit is still likely to be around 4.3 per cent, falling to 3.8 per cent in 2016.

On the upside, however, the 2015 figure is an improvement on the 4.8 per cent projected for that year by the IMF as recently as December. – (Copyright The Financial Times Limited 2011)