IMF offers tough medicine to bring the U.S. budget deficit under control

In an annual report on the U.S. economy, the IMF said the U.S. faces a “central challenge” in implementing a “credible fiscal strategy” to ensure that public debt is put on a sustainable path without putting the economic recovery in jeopardy.

It predicted the recovery would be slightly weaker than what’s anticipated by the Obama administration, and that the U.S. as a result would have to do more to lower its debt.

“Given that we use less optimistic economic assumptions than the administration, we see the need for a more ambitious adjustment to stabilize debt than that envisioned by the authorities,” the report said.

Countries around the world have begun to tighten their fiscal belts, with France, Great Britain, Germany and Japan all looking at austerity packages.

Lawmakers in the U.S. are also worried about adding to record budget deficits, but Obama in recent weeks has warned domestic and foreign audiences not to let stimulating the economy take a complete backseat to deficit cuts.

With sluggish labor and housing markets, economists and politicians alike have worried the economy could slide into a double-dip recession.

President Barack Obama created a bipartisan fiscal commission to tackle the long-term fiscal problems and has tasked it with drawing up a budget by 2015 that’s balanced when excluding payments on debt interest.

According to administration projections, that target corresponds to a deficit roughly equal to 3 percent of gross domestic product. A deficit of that size would be about equal to economic growth and would mean that the level of debt would be stabilized, the administration has argued.

The IMF on Thursday said that would not be enough.

It predicted less economic growth and said a 2015 deficit of closer to 2 percent of GDP is needed to stabilize debt.

“The authorities’ commitment to halve the budget deficit by 2013 and intention to stabilize public debt at just over 70 percent of GDP by 2015 are welcome, although much remains to be done to achieve these aims,” the IMF report said.

The IMF expects annual economic growth to average slightly less than 3 percent through 2015, while the administration has projected annual growth to be slightly more than 3 percent.

The Congressional Budget Office has projected this year’s deficit to be about $1.5 trillion, or 10 percent of GDP.

The IMF suggests taxes will have to be raised to deal with the deficit. It suggests raising more tax revenue by limiting the mortgage interest deduction and imposing higher energy taxes, a national consumption tax and a tax on financial activities.

The IMF did praise the Obama administration’s efforts to control healthcare costs, which is the biggest long-term deficit driver.

Obama’s healthcare reform law “provides a welcome basis for cost control, but initial savings will be modest and will hinge on the implementation of many measures,” the IMF report said.

The IMF said further measures might be needed to deal with healthcare costs, such as a reduction in the tax exemption for employer-provided healthcare.