The International Monetary Fund urged U.S. lawmakers Wednesday to raise America's borrowing limit. It warned that inaction could lead to a spike in interest rates that would harm the U.S. economy and world financial markets.
The debt limit is the amount the government can borrow to help finance its operations. The United States reached its $14.3 trillion borrowing limit in May. It is at risk of defaulting on its debt if it doesn't raise that limit by Aug. 2. President Barack Obama and Republican lawmakers have been at odds on a plan to raise it.
The borrowing limit should be increased "expeditiously to avoid a severe shock to the economy and world financial markets," the IMF said in its annual report on the U.S. economy.
Republicans are insisting on substantial spending cuts before they agree to an increase, including cuts in Medicare. Democrats say they want any deal to include some tax increases.
The IMF also warned in its annual report that rising U.S. budget deficits pose a risk to the economy. But it advocates a long-term strategy for reducing those deficits, not steep immediate cuts or tax increases. Cutting the deficit too quickly could slow the weak U.S. recovery, the fund said.
The U.S. economy will grow this year and next but at a weak pace, the IMF forecasts. The fund projects the economy will expand 2.5 per cent this year and 2.7 per cent in 2012.
Consumers are still paying off debts, which will reduce their buying power. And budget cuts at the federal, state and local levels will also reduce demand.
The IMF's forecast is below recent projections by the Federal Reserve. The Fed expects the economy will grow by as much as 3.3 per cent next year. Many private forecasters, however, are more pessimistic and closer to the IMF's view.
The IMF's warnings on the U.S. deficits echo recent statements from major credit rating agencies such as Standard and Poor's and Moody's. They have warned that they may have to downgrade the United States' credit rating if a deal on the debt ceiling isn't reached and progress toward cutting the deficits isn't made.
Such a downgrade would have "significant global repercussions," the IMF said, given "the central role of U.S. Treasury bonds in world financial markets."
The budget deficit is projected to reach $1.4 trillion this year, above last year's $1.29 trillion gap and just below a record $1.41 trillion reached in 2009.
The IMF has 187 member nations and lends money to countries with troubled finances. It also regularly reviews major national economies to look for signs of trouble that could impact the world economy.