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US debt crisis threatens world economy: IMF

Press Trust of India
Oct 04, 2013 at 11:47am IST

Washington: Terming the current debt crisis in America as "mission-critical", the International Monetary Fund has warned the US that its impending debt crisis could damage not only its domestic economy, but the entire global economy.

"The ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy," IMF Managing Director Christine Lagarde, said.

"So it is "mission-critical" that this be resolved as soon as possible,' Lagarde said in her address to the George Washington University. The United States, she said, needs to "slow down and hurry up."

US debt crisis threatens world economy: IMF

The IMF has warned the US that its impending debt crisis could damage not only its domestic economy, but the entire global economy.

By that she meant less fiscal adjustment today and more tomorrow, she added. "That means replacing the sequester with more back-loaded measures that do not hurt the recovery. At the same time, the US needs to do more to make debt sustainable down the road by containing the growth of entitlement spending and raising revenues," Lagarde said.

Japan, she said, also needs a credible plan to bring down its debt, which is approaching 250 percent of GDP and amounts to about USD90,000 for every man, woman, and child in Japan. The initial consumption tax increase is a welcome first step.

Entitlement reform is the next one. Without these policy fundamentals, any gains made so far could easily melt away, she said. "The fiscal and financial efforts must be complemented by structural reforms to make sure that policies to boost demand are supported by policies to boost supply. We know this can pay off where it matters most in terms of growth and jobs," Lagarde said.

"For the Euro Area, the IMF estimates that comprehensive and coordinated reforms of product and labour markets could boost GDP by 3 per cent after five years. For Japan, increasing female participation in the labour force to match the G7 average would boost per capita GDP by 4 per cent by 2030," she said.

"We should remember that this group of economies accounts for about 40 per cent of world GDP. So, what happens in these regions has profound implications for the rest of the world. This makes engagement with the international community all the more important. National policies alone cannot do it," Lagarde said.

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