'Fiscal cliff': US must avoid even the threat of it, IMF chief warns

The International Monetary Fund on Tuesday joined the chorus of voices warning the United States that failure to deal with the impending “fiscal cliff” of tax hikes and automatic spending cuts looming at the beginning of next year threatens an already “tepid” recovery.

Not only would “failure to reach an agreement to address tax and revenue issues” result in a “severe” blow to the US economy, says IMF Managing Director Christine Lagarde, but simply the threat of a failure to avoid the cliff would also result in “negative repercussions for the rest of the world.”

The IMF’s red flag to US policymakers is part of a review of the US economy that predicts a slightly lower growth rate than the fund anticipated in a spring estimate. The US economy will grow 2 percent this year, the fund now predicts, down from the 2.1 percent it forecast in April.

The IMF also revised down slightly its growth estimate for 2013, to 2.25 percent.

The fiscal cliff is the name given to the combination of automatic federal-government spending cuts and expiration of Bush tax cuts that will take effect Jan. 1 without government action. Concern about it has been growing on the domestic front for several months. But the IMF’s alarm signals mounting apprehension among international economic players as well.

For the US alone, doing nothing and going over the fiscal cliff would reduce US economic growth to “marginally positive, if at all,” said Ms. Lagarde at a press briefing in Washington Tuesday. But she suggested that the US also needs to consider the crucial role its economy plays in the global economy.

“Too strong a contraction of the US economy ... will have a significant spillover effect outside the US,” she said.

The IMF review underscores the importance of “a multilateral approach to economic policy management,” especially by big economic powers like the US.

The review of the US economy, Lagarde noted, also says upfront that events in Europe in particular – a failure to stabilize and strengthen the eurozone, for example – will have an impact on US economic prospects.

Yet in reviewing the report on the US economy with journalists, she noted wryly that participation in the global economy entails “a receiving end and a sending end” – adding that “it’s more natural for leaders to speak of the receiving – what’s happening to me.”

Whether by design or not, those words conjured up images of President Obama emphasizing with European leaders the need for them to address without delay the eurozone’s weak links and to consider more stimulus to get the European economy out of recession.

On the other hand, the evidence of Mr. Obama welcoming European advice on handling the US economy – or on backing away from the fiscal cliff – is less clear.

But as Lagarde said, it is the role of the IMF to remind even a power like the US, the fund’s largest shareholder, both of what if likes to hear and what it doesn’t.