WASHINGTON: The US government's budget deficit came under fire on Wednesday from two global institutions saying a plan to halve the record gap by 2009 may not be enough to stop long-term damage to the world economy.
The International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) said in separate reports on the US economy that there was concern that the positive impact of the deficit in leading a global recovery could not last.
The US budget deficit is forecast to grow as much as 4.5% of gross domestic product (GDP) this year.
IMF chief economist Raghuram Rajan said that US budget demands had grown with spending on the wars in Iraq and Afghanistan and stronger measures were needed to get the gap under control.
“The assumptions about the deficit that the US administration had – that it will fall to half this fiscal year 2004 level in the next five years – relies on a number of assumptions which could be questioned,” Rajan told reporters.
In its World Economic Outlook report, the IMF said a prolonged deficit could push up interest rates and hurt productivity and income.
Rajan said an increase in interest rates was just a matter of time as the US economic recovery gained ground and the private and public sectors competed for funds, increasing pressure on long-term borrowing rates.
Such a move would present risks for emerging market economies, which are sensitive to higher rates because most of their debt is in foreign currency.
In another development, a European monetary source told Reuters the United States was backing Rodrigo Rato for the IMF's top job, amid growing signs that battle lines are being drawn ahead of next week's meeting of top finance ministers.
Rato and France's Jean Lemierre are so far the leading candidates in the race and the Frenchman, currently head of the European Bank of Reconstruction and Development, has the blessing of both Berlin and Paris. – Reuters