September 20, 2011 / 7:33 PM / 7 years ago

U.S. credibility at stake if fails to cut debt: IMF

WASHINGTON (Reuters) - Any effort by the United States to pare its massive public debt without bringing in more revenue and tackling expensive benefit programs will lack credibility, the International Monetary Fund said on Tuesday.

Pedestrians walk past the outside of the New York Stock Exchange in New York July 25, 2011. REUTERS/Lucas Jackson

To show U.S. creditors and markets the government is serious about reining in the country’s $14.7 trillion debt, the IMF said so-called entitlement programs, such as the Social Security retirement program, must be reformed.

U.S. credibility “could suddenly weaken if sufficiently detailed and ambitious plans to reduce deficits and debts are not forthcoming,” the fund said.

“Any credible strategy will need to include entitlement reforms and higher revenues. Widening tax bases by phasing out tax expenditures would be a good place to start,” it added.

The Obama administration on Monday unveiled a $3.6 trillion deficit reduction plan that steers clear of Social Security and does not make structural reforms to the Medicare health care program for the elderly.

At the same time, Republicans in Congress have made clear that they would oppose any plan that raises taxes.

The IMF said current low U.S. interest rates reflect the significant goodwill the United States has earned from investors even though there are fundamental weaknesses in the country’s fiscal situation, suggesting Washington could see a reversal of fortune unless it puts a credible deficit reduction plan in place.

Conventional fiscal indicators such as deficits and debt ratios are no better for the United States than in many European countries that currently face significant market pressure, the fund said.

A special committee of U.S. lawmakers is grappling with how to cut at least $1.2 trillion from deficits over the next 10 years. The committee must come to agreement by late November or else deep spending cuts to domestic and military programs will automatically kick in.

The Obama administration would count on tax revenues for about half of its proposed budget savings. The plan, which needs congressional approval to become law, includes a minimum tax rate for people earning more than $1 million a year, a proposal that has drawn heavy fire from Republicans.

The IMF’s fiscal affairs director, Carlo Cottarelli, did not condone the proposal but said that it was a legitimate tax policy goal “to make sure that the burden of taxation is distributed fairly.”

Editing by James Dalgleish

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