Finance chiefs of the world’s 20 leading economies were ringing alarm bells over the US fiscal cliff and Europe’s debt woes at a meeting in Mexico over the weekend as they look to push back deficit reduction targets to help boost growth.
Unless a fractious US Congress can reach a deal, about US$600 billion in government spending cuts and higher taxes are set to kick in on Jan. 1, threatening to push the US economy back into recession and hit world growth.
However, with the US presidential election looming tomorrow, dealing with the fiscal cliff has been delayed.
“The Americans themselves acknowledge that this is a problem,” a G20 official said on condition of anonymity. “The US administration says it doesn’t want to fall off the fiscal cliff, but right now it can’t tell us how exactly it will address it because that issue is on ice ahead of the election.”
Tax cuts enacted under former US president George W. Bush are set to expire in January, when automatic spending cuts designed to put pressure on lawmakers to strike a long-term budget deal are also set to kick in.
“What remains a sort of key aspect is that the United States is not respecting the current commitments [to reduce its deficits] and does not have a credible fiscal consolidation plan,” one European official said.
The US Congress will also soon have to raise the nation’s debt limit to avoid a default.
An initial consensus around the need for urgent action to prevent a new depression has given way to deep differences over issues such as spending to boost growth and the right pace of belt-tightening to tackle high debt levels. Organisation for Economic Co-operation and Development Secretary-General Jose Angel Gurria said on Saturday that the G20 should appeal to the US to avoid the fiscal cliff, but added that he was optimistic that Congress would strike a deal.
“I still believe it is not going to be applied,” Gurria said in an interview before the meeting of G20 finance ministers, which was formally set to start yesterday.
Officials are also concerned about Japan’s own fiscal cliff and recognize that commitments made by developed countries to cut their budget deficits in half by next year and to stabilize their debt load by 2015 look unfeasible.
US and European officials are also likely to come under pressure from G20 peers for dragging their feet on implementing the so-called Basel III accords on financial regulations, the world’s response to the 2007 to 2009 financial crisis.
Despite the issue’s prominence, a G20 source said Russia wanted to keep financial regulation discussions at a more technical level when it takes over the presidency of the group from Mexico after this meeting, set to end today.
Spain’s reluctance to seek financial aid is stoking worries that Europe’s debt crisis could further hurt world growth. The government is under pressure to seek a bailout as it struggles to cope with high public debt and the cost of recapitalizing its banks. Sources say they expect Spain to seek financial aid from the eurozone this month.
A government source said on Wednesday that Spanish Prime Minister Mariano Rajoy had not ruled out applying for a rescue, but Rajoy has signaled he will not rush unless market conditions deteriorate significantly.