Tags: IMF | US | Fiscal | Cliff

IMF’s Lagarde: US Must Address ‘Fiscal Cliff’ Now to Avoid Disaster

Tuesday, 03 Jul 2012 02:28 PM

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The U.S. economy is growing, albeit tepidly, and can continue to improve provided lawmakers address the fast-approaching “fiscal cliff” sooner rather than later, says Christine Lagarde, managing director at the International Monetary Fund, a multilateral lending institution.

The fiscal cliff will hit at the last day of the year, when Bush-era tax cuts and other tax holidays expire right when automatic spending cuts designated under the 2011 debt ceiling agreement kick in.

The combination of tax hikes and spending cuts at the same time could siphon billions out of the economy next year alone and derail recovery.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Congress can adjust the timing of the events.

"If those risks materialize, or if the threat of it grows, that could really, Number one, erode confidence and Number two, if they were to materialize, it could contract the U.S. economy that we see growing in 2012 at about 2 percent and 2.3 percent in 2013," Lagarde tells CNBC.

"But if these risks were to materialize, it would reduce that growth to almost nothing. The second downside risk is the risk coming from the outside. That is the eurozone. Deterioration of the situation in the eurozone area would be a risk to the U.S. recovery."

The sooner the government gets busy the better and that goes beyond temporary measures taken by the government.

"It would be far better, far better that it is addressed early on and before we get close to the risk. We think that the debt ceiling risk is likely to materialize very early in 2013, and I'm sure the Treasury Department can use certain tools and mechanism to push the deficit cliff a little bit into 2013," Lagarde says.

"If there was an agreement early on, it would be a serious confidence booster for the U.S. economy."

Some lawmakers are suggesting allowing the fiscal cliff to occur on January 1, 2013.

The logic, however, would be that after November's elections, a new government could quickly tackle the problem, as neither party wants the damage from the fiscal cliff to occur, and with the government flush in fresh tax revenues at the beginning of the year, a quick decision on adjusting tax hikes and spending cuts would cause only minimal damage, even if tax cuts, for example, were retroactive.

"My preference would not be to accept a lesser solution than you could get in February and March just to say that you got it done before the end of the year," say Senator Roy Blunt, a member of Republican leadership and congressional liaison to Republican presidential nominee Mitt Romney, according to Reuters.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did



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