IMF Chief Lagarde: Fiscal Cliff Uncertainty Will Get Worse

Monday, 15 Oct 2012 04:34 PM

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Uncertainty surrounding a fast-approaching fiscal cliff will worsen and continue to dampen an already sluggish U.S. recovery, said Christine Lagarde, managing director of the International Monetary Fund (IMF).

At the end of the year, the Bush-era tax cuts and other tax breaks expire right when automatic spending cuts take effect, a combination known as a fiscal cliff that could send the country sliding into recession next year if left unchecked by Congress.

The spending cuts were designed to kick in automatically after lawmakers were unable to find ways to trim expenditures as part of an agreement to lift the debt ceiling in 2011.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Congress has largely avoided addressing tax and spending reform in an election year, though some lawmakers have suggested they can convene after elections or even in early 2013 after the cliff has passed and address the issue — possibly lifting the debt ceiling anew — in the coming months.

Regardless of whether Congress strikes a deal, uncertainty surrounding the fiscal cliff has many businesses putting off plans to expand and hire, largely because they don't know how much they will be paying in taxes.

That's hurting the economy today and may get worse as 2013 approaches.

"The IMF has been warning for quite a while about the uncertainty risk associated with a fiscal cliff and the debt ceiling — both of them. This uncertainty's going to increase as we get closer to year end," Lagarde told CNBC.

"And it's a concern because investors, households, people who want to buy a house or make an investment and hire people would like to know what the environment is going to be like ... so that they appreciate exactly what environment they will be in, what tax rates will apply, what loopholes will survive or not."

The nonpartisan Congressional Budget Office estimates that the economy could contract by 0.5 percent next year if the economy rolls over the cliff, while the International Monetary Fund has said such an event threatens global economy.

The IMF said that the global economy will expand 3.3 percent this year and 3.6 percent in 2013.

Both forecasts represent downward revisions from July's calls for 3.5 percent growth this year and 3.9 percent in 2013.

"The global economy's growing. We've revised downwards, but it is still growing," Lagarde said, according to CNBC.

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible


The ongoing European debt crisis and fears the U.S. will go over its fiscal cliff have slowed economies elsewhere, including once red-hot economies in China and Brazil.

Thus the whole world is suffering.

"We have had an effect now on the emerging market economies," Lagarde said.

"Six months ago, we didn't truly expect either Brazil or India or China or Russia to, you know, slow down compared with the reasonably fast pace at which they were growing."

Business leaders in the U.S. are urging policymakers to end the anxiety that comes with tax uncertainty.

Business Roundtable president John Engler, a former Republican governor of Michigan, urged lawmakers to avoid partisan bickering and deal with the issue quickly.

"I think the American people care about the future of their country, and they understand there's going to have to be a compromise," Engler told the Detroit Economic Club, according to Reuters.

"Our present course is unsustainable and unfair to future generations."

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