US vows to avoid fis­cal cliff amid G-20 warn­ing

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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.

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