US vows to avoid fiscal cliff amid G-20 warning
The U.S. gave an election-eve commitment to “carefully calibrate” its budget retrenchment amid global warnings that a rush of austerity would harm the weak world economy.
As Americans prepared to choose a president, Group of 20 finance chiefs said after talks yesterday in Mexico City that the U.S. pledged to avoid a “sharp fiscal contraction” in 2013. That’s when $607 billion of automatic tax increases and spending cuts are set to take effect unless lawmakers act.
Japan was urged to restrain a debt totaling 237 percent of gross domestic product. “Time is of the essence and significant policy uncertainty in Washington must be addressed,” International Monetary Fund Managing Director Christine Lagarde told reporters. “It will be important for the U.S. to address quickly the so-called fiscal cliff.”
The push for U.S. action took center stage at the G-20 meeting during which finance ministers also agreed to dilute their two-year-old budget-cutting goals. Their new vow, to ensure the “pace of fiscal consolidation is appropriate to support recovery,” highlights increased concern that government belt-tightening would threaten an expansion the G-20 labeled modest. The statement “reflects how the consensus has become less austere,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “Previously, austerity was thought best, but markets don’t seem to believe that now and politicians are recognizing they have to be realistic over what can be achieved.”
The IMF estimates the U.S. fiscal tightening, set to begin in January, is equivalent to 4 percent of gross domestic product, the most since the 1940s and about double the U.S.’s current growth rate. Resolution has been postponed until after today’s election as Democrats back scheduled tax increases on the wealthy and Republicans prefer reduced spending.
While U.S. Treasury Secretary Timothy F. Geithner skipped the Mexico City meeting, Mexican Finance Minister Jose Antonio Meade said the U.S. officials present made a “clear promise” to pursue a bipartisan deal that would deliver “a path of public-finance sustainability, but not too much to put growth at risk.”
The G-20’s discussion of the U.S. marked a broadening in focus on fiscal challenges beyond Europe, whose threeyear debt turmoil dominated recent talks among the world’s leading industrialized and emerging economies. Those stresses have eased after the European Central Bank pledged to buy bonds and governments pursued closer banking supervision. “Europe is delivering on its commitment to do whatever it takes to safeguard the stability of the euro area,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said.
The G-20 still called on euro area policy makers not to delay enactment of crisis-fighting measures such as a banking union and to finish retooling their rescue fund to allow it to recapitalize banks.
Japan was urged to restrain a debt totaling 237 percent of GDP and its political impasse over funding this year’s budget was identified as a threat to growth. In promising not to jeopardize economic health with budget reductions, the G-20 governments changed their tone from a June 2010 summit in Toronto, when eight of the group’s richest economies, aside from Japan, endorsed cutting deficits in half by 2013 and stabilizing or reducing debt as a share of GDP by 2016. Progress has since been mixed with the latest IMF estimates showing only South Korea, Canada and Australia largely on course to meet both goals. The U.S., for example, faces a budget gap of 7.3 percent of GDP next year versus 11.2 percent in 2010, and a debt of 114.2 percent of GDP in 2016, compared with 98.6 percent in 2010.
The hand of those advocating a more measured retrenchment was strengthened by a mid-year global growth slump and signs that the prescribed austerity has not proved an elixir for Europe’s woes. The IMF also modified its stance last month when it released research suggesting budget cuts have a bigger impact on economies than previously envisaged.
German Finance Minister Wolfgang Schaeuble, who oversees a budget almost in balance, nevertheless called paring excessive debt “unavoidable for sustained growth” and said others should “meet their obligations.”
The G-20 said it will still ensure public finances are heading toward sustainability and told those countries with fiscal room to support growth. While policy makers said in their statement such nations had promised to underpin demand if it deteriorates, Russian Finance Minister Anton Siluanov said Russia and China were “skeptical” about the proposal. The group agreed that when officials next meet in Russia they will identify “credible and ambitious” new debt targets for beyond 2016, policy makers said in the statement.