imf says u.s. budget gap threatens investment

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    IMF Says U.S. Budget Gap Threatens Investment, Growth (Update1)
    Aug. 5 (Bloomberg) -- Record U.S. budget and trade deficits under President George W. Bush threaten to undermine investment and growth, the International Monetary Fund said in its annual review of the world's largest economy.

    The swelling budget deficit, projected by the White House to reach a record $455 billion this fiscal year, ``will make it even more difficult to cope with the aging of the baby-boom generation, and will eventually crowd out investment and erode U.S. productivity growth,'' the IMF said.

    The IMF's board of directors, which issued the report, urged the U.S. to return to a balanced budget within five to 10 years and take steps to strengthen Social Security and Medicare. Any measures to increase Medicare benefits should consider the impact on the system's ``longer-term financial problems.''

    The report comes as Democratic rivals in the 2004 election year pressure Bush about swelling deficits and increasing joblessness. Bush has pushed through three tax cuts totaling $1.7 trillion during his term, which started in 2001.

    The U.S. had run surpluses from fiscal years 1996 through 2000, the longest spell of black ink since the Great Depression.

    Rob Nichols, a spokesman for the U.S. Treasury, disputed the findings, saying the $330 billion tax cut approved this year would spur growth and create jobs.

    Growth Forecast

    ``The U.S. deficits -- while not welcome, and bear watching - - are manageable,'' Nichols said in a statement. The deficits ``need to be reduced and they will be reduced by increasing our GDP growth.''

    The U.S. economy grew at a 2.4 percent annual rate in the second quarter, the Commerce Department reported last week. That's up from 1.4 percent growth in each of the previous two quarters.

    The U.S. banking system has been ``resilient'' and balance sheets ``appear to have held up well'' during a recession that the fund described as ``mild and short-lived,'' the report said. The IMF urged banks to be alert to the effects of ``an eventual turnaround in interest rates or a possible cooling of real estate markets.''

    The report also said government-charted companies such as Fannie Mae, the largest source of mortgage funding in the U.S. and Freddie Mac, the second largest source of U.S. mortgage finance, should be held to the same standards as other publicly traded companies.

    Inflation Target

    Freddie Mac is under investigation by its regulator, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission and a U.S. attorney after the company understated its earnings by as much as $4.5 billion.

    Some details of the IMF had been disclosed previously. In June, the Treasury Department released information from its meeting with IMF reviewers. The report called for greater regulation of Freddie Mac and Fannie Mae as well as a reduction in interest rates, a move the Federal Reserve has since taken.

    Some directors also said the Fed should state an inflation target, which may ``ease concerns, about possible, albeit remote, deflation risks.''

    The IMF projects the U.S. economy will grow 2.25 percent this year and 3.5 percent in 2004.

    The report also urged the U.S. to boost savings and bring its record current account deficit ``to a more sustainable position.''

    The deficit in the U.S. current account, the broadest measure of international trade because it includes investments, widened to a record $136.1 billion in the first quarter, the Commerce Department reported in June. The shortfall equaled 5.1 percent of gross domestic product, also the highest ever.

    Role of Dollar

    The depreciation of the U.S. dollar, which has fallen about 10 percent against the euro this year, would have only a ``relatively modest'' effect on helping to ease the current account deficit ``since the dollar had depreciated against the currencies of only a limited set of U.S. trading partners,'' the IMF said.

    Japan and China have not let their currency appreciate against the dollar.

    U.S. manufacturers complain that the Chinese yuan, pegged at 8.3 to the dollar for eight years, is as much as 40 percent undervalued and contributed to a record trade deficit of $103 billion with China in 2002.

    Some members of the IMF board also encouraged the U.S. to ``take early action'' to comply with recent trade rulings at the World Trade Organization.

    The U.S. Congress has yet to act on a ruling early in 2002 that a tax break for exporters violates global trade rules. The Bush administration as well says it intends to appeal a WTO ruling against U.S. tariffs on imported steel, in place since March 2002.

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