- WASHINGTON (Dow Jones)--Economists
at the International Monetary Fund on Wednesday expressed alarm at growing
U.S. budget deficits, saying continued deficits could hurt the global economy
by roiling currency markets and driving up interest rates.
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- In a report on U.S. budget outlook, IMF researchers described
the state of government finances as "perilous" in the long run
and urged Congress and the White House to take steps to quickly rein in
the deficits. Although federal tax cuts and spending increases since 2001
bolstered the global economy in the short run, the report said "large
U.S. fiscal deficits also pose significant risks for the rest of the world."
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- A key risk is that the recent slide of the U.S. dollar
against other major currencies could become "disorderly," the
researchers said. The dollar has declined sharply since early 2002 against
both the European common currency and the Japanese yen, complicating the
task of European and Japanese monetary policymakers, said Charles Collyns,
who heads the IMF team that monitors the U.S. economy.
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- "We feel there is a substantial risk that the foreign
investors' appetite for U.S. assets, and in particular U.S. government
assets, will over time diminish," Collyns said in a news conference.
"We think to some degree over the past year this has occurred, and
this is one of the reasons why there has been weakness in the U.S. dollar."
So far, he said, the decline hasn't jeopardized the economic recoveries
in Europe and Japan, but the danger to the global economy could grow if
the U.S. budget deficits aren't shrunk.
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- The White House has said it expects the budget deficit
to expand to a record $ 475 billion in fiscal 2004, exceeding 4% of the
gross domestic product. U.S. Treasury Secretary John Snow on Wednesday
described that level as "entirely manageable," and said the Bush
administration expects the deficit to shrink to 2% of GDP within five years.
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- But the IMF researchers said that won't be enough to
address the government's long-term fiscal problems - including financing
the Social Security and Medicare programs over the next 75 years. In their
report, they said the government faces a $47 trillion shortfall in its
ability to pay for those and all other long-term obligations. Closing that
gap would require "an immediate and permanent" federal tax increase
of 60% or a 50% cut in Social Security and Medicare benefits.
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- The dollar's recent decline, the researchers said, suggests
that foreign investors are starting to worry about the U.S. government's
ability to resolve its long-term fiscal problems. "The United States
is on course to increase its net external liabilities to around 40% of
GDP within the next few years - an unprecedented level of external debt
for a large industrial country," they said in the report. "This
trend is likely to continue to put pressure on the U.S. dollar."
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- The IMF report said the ratio of U.S. public debt to
GDP is expected to increase by 15 percentage points over the next decade.
If that occurred, global interest rates, adjusted for inflation, would
rise by an average of 0.5 to 1 percentage point. "Higher borrowing
costs abroad would mean that adverse effects of U.S. fiscal deficits would
spill over into global investment and output," the report said.
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- Congress and the White House can avert those dangers
by acting immediately to balance the budgets, the researchers estimated.
Allowing the recent tax cuts to expire by 2013 would reduce the budget
shortfall by nearly half. The researchers also said Congress should consider
a tax on energy consumption, arguing that it would "help meet the
administration's environmental objectives while also providing substantial
support for fiscal consolidation." Such tax increases, they calculated,
would have a minimal effect on U.S. economic growth.
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