US deficits threaten global economy: IMF

Uncontrolled US budget deficits would pose a serious threat to global prosperity in coming years as rising interest rates depress economic growth in the US and around the world, the IMF said.

The IMF released a new analysis on Wednesday that predicted if nothing is done to get control of the soaring US deficits, it would shave global economic output by 4.2 percent by 2020 and reduce US economic growth by 3.7 percent during the same period.

IMF said much of the adverse impact would occur because of increased borrowing demands in the US to finance the budget deficit. This would drive up US interest rates and interest rates in other countries as the global supply of available capital is reduced, they said.

"The rest of the world is affected seriously by the US fiscal deficit," IMF chief economist Raghuram Rajan told reporters in a briefing on the new report.

The IMF's forecast that the US budget deficit will be a significant drag on growth reflected what will occur if there is no improvement in the deficit, which the Bush administration projects will hit US$521 billion this year, a record in dollar terms, and show little improvement in coming years.

President George W. Bush submitted a budget to Congress this year projecting that he will be able to cut the deficit in half over the next five years, reducing it to a shortfall of US$237 billion in 2009.

The IMF said that if Bush is able to accomplish such a reduction in the budget deficit, it would significantly lower but not eliminate the adverse effects from the deficit on the US and global economies.

It saw a long-run impact from such a budget reduction as reducing global economic output by 2.55 percent, compared to a reduction of 4.2 percent under the worst-case scenario in which the deficit remains at the current record levels.

Under Bush plan to reduce the deficit, US economic growth will be depressed by 1.88 percent in the long-term, compared to 3.68 percent under the more adverse deficit path.

However, the fund said that if Washington decided to pursue more rapid deficit reduction, the adverse drag on growth would be greatly reduced to just 1.03 percent in the long-term in the US and 1.47 percent worldwide.

"It would be good if there were stronger measures put in place to contain the deficit and that is what we are looking for," Rajan said.

The IMF analysis of the economic impact of the US budget deficits represented the latest in a series of reports in which the 184-nation international lending agency has urged stronger measures to get control of the deficit.

Responding the latest study, US Treasury Department spokesman Tony Fratto said Bush's tax cuts had helped make the US an engine of world growth.

"The global economy is better off because of the strong growth in the United States," he said.

The IMF report conceded that the US deficit, which reflected in part the impact of Bush's tax cuts, was useful in helping the US and the global economy recover from the adverse effects of a number of shocks, such as the 2001 recession, the terrorist attacks and the bursting of the stock market bubble.

While rates have yet to show significant increases in spite of the large budget deficits, the IMF said it was only a matter of time before rates rise, reflecting an improving economy, increased demand for credit by businesses and actions by the Federal Reserve to start raising interest rates to keep inflation under control.