* IMF urges U.S. to remove uncertainty of 'fiscal cliff'
* Lagarde: threat of fiscal cliff may hurt growth this year
* IMF cuts 2013 U.S. growth forecast
* IMF says U.S. needs credible fiscal consolidation plan
By Lesley Wroughton
WASHINGTON, July 3 The International Monetary
Fund on Tuesday urged the United States to quickly remove the
uncertainty over the path of fiscal policy, which is set to
tighten abruptly at the start of next year without congressional
IMF Managing Director Christine Lagarde warned that just the
threat of the "fiscal cliff" could weaken U.S. economic growth
later this year and she called for action to address it sooner
rather than later.
She said the potential for a deterioration in the euro zone
debt crisis was the other main risk facing the United States.
The U.S. economy is facing $4 trillion worth of expiring tax
cuts and automatic government spending reductions, and most
analysts do not expect Congress to act to soften the blow until
after the congressional and presidential elections in November.
"It is critical to remove the uncertainty created by the
'fiscal cliff' as well as promptly raise the debt ceiling,
pursuing a pace of deficit reduction that does not sap the
economic recovery," the IMF said in its annual health check of
the U.S. economy.
The IMF statement comes at the end of annual economic
consultations with authorities in the United States and is part
of regular assessments of all of the Fund's 188 member states.
Lagarde warned that the potential for a political showdown
over the U.S. budget and debt ceiling could shake confidence
Last year, a fight over raising the debt limit undermined
financial markets and was a factor in Standard and Poor's
decision in August to yank the United States' top-tier AAA
In addition to the looming budget tightening, the United
States is expected to hit the $16.4 trillion statutory limit on
its debt sometime between the election and the end of the year.
If Congress fails to raise it, it would lead to a U.S. default.
Most analysts expect Congress to strike a post-election deal
to avoid the "fiscal cliff" and buy time for lawmakers to work
on a long-term budget and tax plan. But the uncertain outlook
already appears to be weighing on business hiring and investment
The Fund forecast a modest 2 percent growth in the United
States this year and shaved its projection for 2013 to 2.25
percent from 2.4 percent the IMF forecast in April.
But it warned that the already modest forecast for next year
could prove much too optimistic if Congress fails to relax the
fiscal tightening of about 4 percent of gross domestic product
contained in current law.
If Congress does not act, the economy could contract early
next year and annual growth could come in well below 1 percent,
the IMF said.
"We believe that fiscal consolidation is necessary but not
just any fiscal consolidation. It has to be sensible and
certainly not excessive," Lagarde told a news conference.
The Fund said that over the medium term both revenue
increases and reforms to government entitlement programs would
be needed to help curb the growth in U.S. debt.
For now, however, it said the focus should be on fostering
"Continued policy action is needed to boost the recovery,"
Lagarde said. "We believe that the U.S. authorities do not have
a lot of space available - they have limited space actually - to
act but they should use it to support the recovery."
The IMF said U.S. monetary policy was appropriately "very
accommodative" and emphasized that the Federal Reserve had room
for further easing should economic conditions worsen.
The U.S. central bank has held overnight interest rates near
zero since December 2008 and has bought $2.3 trillion in bonds
in a further effort to lower borrowing costs. Last month it
extended a program to reweight its bond holdings toward
longer-dated securities to push long-term interest rates lower.
The Fed has said it is prepared to do more to spur a
stronger recovery if needed and a raft of weak data has kept
speculation alive that it might soon launch another round of
bond purchases to lift the economy.