TOKYO – 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 totalled $1.1 trillion, though a 6.4 per cent 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.
At Saturday’s meeting of the IMFC, which advises the IMF and monitors the world financial system, officials from developing and emerging economies urged the U.S. and European nations to prevent malaise in their regions from slowing global growth.
“Advanced countries should rethink their macroeconomic strategies and avoid simultaneous fiscal contractions and the consequent overburdening of monetary policies,” Guido Mantega, Brazil’s finance minister, told the committee.
“In many advanced economies, fiscal and structural policies are severely hampered by political paralysis,” Mantega said. He urged that spending be focused on areas that can have a maximum impact and on social safety nets to protect the poor.
He and other finance ministers expressed concern over monetary easing in the U.S. and other countries that is meant to encourage more bank lending, but that some worry could destabilize markets while failing to stave off recession.
During the meetings in Japan, IMF managing director Christine Lagarde has been urging countries to not sacrifice growth for the sake of austerity, saying they should temper spending cuts to help create jobs and support future growth.
Balancing those sometimes competing priorities is the central puzzle facing policymakers as the world economy slows further, even in dynamic Asia.
Growth has slowed in Asia and is sapping the potential in the poorest countries, many of which depend on exports of minerals, oil and other commodities to the industrial countries.
“We should all be committed in our resolve to avoid a worst case scenario where strains in the euro area deepen, fiscal cliff and debt ceiling problems in the U.S. are not resolved, and growth in emerging market economies continues to decline,” Pravin J. Gordhan, South Africa’s finance minister, told the meeting on Saturday.
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.
Greece, Spain and other European countries labouring 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.
The IMF has scaled back its global growth forecast for 2012 to 3.3 per cent from 3.5 per cent, 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 IMF said economic growth in the Asia-Pacific region slowed to 5.5 per cent 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 IMF’s outlook for the African region was “broadly positive” with growth forecast at over 5 per cent in 2013, supported by strong domestic demand. However, it warned of risks for food security due to surging grain prices and the spillover of weaker growth in Europe.
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 â€” economic surveillance, advice and providing temporary funding â€” 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.