Geithner: Work remains despite US fiscal progress
Despite making progress on getting its fiscal house in order, the United States still has much work to do, Treasury Secretary Timothy Geithner told fellow financial leaders Saturday. The comment came just hours after the U.S. government announced that the budget deficit had topped $1 trillion for a fourth straight year despite a modest improvement thanks to stronger economic growth.
"It is important that we in the U.S. enact a balanced framework to bring down our fiscal deficit and debt over several years, while continuing to provide support for jobs and growth in the short term," Geithner told a meeting of the International Monetary and Financial Committee during the annual meeting of the IMF and World Bank, which is being held in Tokyo.
The Treasury Department said Friday that the deficit for the 2012 budget year totaled $1.1 trillion, though a 6.4 percent increase in tax revenues thanks to stronger growth helped contain the deficit.
The risk of the U.S. running into a "fiscal cliff" of tax increases and deep spending cuts next year unless the Obama administration and Congress resolve a deadlock over the budget has overshadowed the gathering of top financial officials. Such a prospect would deal a heavy blow to the economy, eroding progress made since the 2008 global crisis.
The overwhelming emphasis of the Tokyo gathering has been on coddling fragile growth around the globe. On Friday, IMF managing director Christine Lagarde urged that countries not sacrifice growth for the sake of austerity. The pace of government debt reduction must be tempered by spending to help get the unemployed back to work, she said.
Balancing those sometimes competing priorities is the central puzzle facing policymakers as the world economy slows further, even in dynamic Asia, Lagarde said.
Greece, Spain and other European countries laboring under massive debts have slashed spending and raised taxes, seeking to restore confidence in their public finances and qualify for emergency financing. The economies of financially healthier European countries, such as Germany and Finland, face a potential blow to growth if those troubled economies fail to get their financial houses in order. At the same time, the recovery of the 17-nation grouping that uses the euro could founder if tax increases and spending cuts bite too deeply.
While there seems to be a wide consensus on long-term strategies for reform, there is less agreement on how painful such policies should be in the near term given the persistent risk of recession and surging unemployment.
"One lesson though is clear from history," Lagarde said. "Reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth, so it's a very narrow path to be taken."
"It's probably a long path, and one for which there is probably no shortcut either. It's a path that needs to be taken," she said.
Lagarde said monetary policies must encourage banks to lend, while spending cuts are adjusted to the "right pace." Debts must be brought down in the medium term, and structural reforms are needed to sustain growth in the long term, she said.
"That's the package that is needed," Lagarde said. "Let us not delude ourselves. Without growth, the future of the global economy is in jeopardy."
"It's a marathon, not a sprint. It could take years," Lagarde said in an on-camera debate hosted by the British Broadcasting Corp., where she good naturedly traded jibes with German Finance Minister Wolfgang Schauble.
"When you are running the 42 kilometers of a marathon, you can't just stop and turn around and go the other way," Schauble retorted, accusing those who favor going easy on debt reduction of backpedaling on their commitments.
"Increasing public debt does not enhance growth, it damages growth," he said.
Lagarde contended that it was not an issue of reversing commitments but of adjusting the pace to suit each country's unique situation.
The IMF has scaled back its global growth forecast for 2012 to 3.3 percent from 3.5 percent, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.
On Friday, the fund said economic growth in the Asia-Pacific region slowed to 5.5 percent in January-June. That is well above the global average, but the lowest for the region since the financial crisis in 2008. The slowdown is largely because of sluggishness in Europe and the U.S. It also noted weakness in China and India, whose dynamism had helped counter weakness elsewhere.
"The global recovery is still too weak. Job prospects for untold millions are still too scarce, and the gap between the rich and the poor is still way too big," Lagarde said.
Europe's darkening economic outlook is drawing calls for more public support even from austerity champion German Chancellor Angela Merkel. She said Thursday that it was incumbent on Germany, whose 0.3 percent growth in the second quarter helped offset a 0.2 percent contraction among the 17-nation grouping that uses the euro, to "do things to stimulate the European economy."
Lagarde has urged that European creditors give Greece an extra two years to meet austerity targets required to get and continue receiving loans, after the country nearly defaulted on its mountain of debt.
Such accommodations would just confuse markets, increasing uncertainty, Schauble said.
In Japan, both Lagarde and Jim Yong Kim, president of the World Bank, have stressed that without greater equity and equality, growth will be unsustainable.
The IMF's mission is threefold - economic surveillance, advice and providing temporary funding - while the World Bank's mission is to fight poverty. The bank uses funds from donor members and proceeds from bond sales to provide low-interest loans to developing countries.
During the meetings, Kim has spoken often about the need to ensure food security for the poor at a time when spikes in prices have become routine.
To fortify a "safety net" for crises while supporting improvements to make farming more efficient and sustainable, ministers pledged new funds for the Global Agriculture and Food Security Program, a trust fund set up in 2010.
Japan and South Korea each promised $30 million in new funding, while the U.S. pledged to contribute an extra $1 for every $2 contributed by other donors, up to a total amount of $475 million. Including those new funds, the fund has financial support of $1.3 billion.
Associated Press writer Malcolm Foster contributed to this report.