IMF urges US to cut debt to spur recovery

Amid jitters that high levels of unemployment may force a double dip recession, the IMF warned the slow US recovery would continue and that debt problems loomed.

The Obama administration is overestimating U.S. economic growth and needs to reduce its budget deficit far more aggressively, the International Monetary Fund said on Thursday in a report that targeted Social Security, the home mortgage interest deduction and other politically sensitive policies as ripe for cutting.

“The central challenge is to develop a credible fiscal strategy to ensure that public debt is put– and is seen to be put–on a sustainable path without putting the recovery in jeopardy,” an IMF report said.

And in its first-ever analysis of the U.S. financial sector, the agency warned that the recovery and seeming health of the banking industry may be illusory, threatened by an expected wave of defaults on commercial real estate loans and possibly in need of another large injection of capital. Small- and medium-size firms, clustered on the West Coast and in the South, are at particular risk from what may be a trillion dollars worth of bad loans for offices and other commercial buildings, IMF officials said in a briefing.

Though the economic recovery in the United States “has become increasingly well established . . . the risks are tilted to the downside,” said David Robinson, deputy director of the IMF’s Western Hemisphere department. Recent data “have increased those downside risks.”

The assessment is in line with growing concern among members of the U.S. Federal Reserve and elsewhere that the U.S. recovery is losing steam. The IMF said recent data–whether the slow advance of hiring, a laggard home market, or a weak stock market–are not enough in themselves to downgrade its forecasts for U.S. growth, which it predicts will be 3.3 percent this year and 2.9 percent next year.

But it also notes that those forecasts are lower than those used in the Obama administration’s plan to cut the U.S. budget deficit in half by 2013 and stabilize overall U.S. debt by 2015.

President Barack Obama has plowed nearly a trillion dollars into the economy to spur economic growth, exploding the US deficit to a level that many believe is unsustainable.

While the United States has already taken steps to freeze spending, the IMF said the Obama Administration may need to increase taxes to hit its deficit reduction targets.