The head of the International Monetary Fund, Christine Lagarde, advised that the United States should raise taxes and lower spending so as to not undermine economic confidence. Lagarde said that so-called 'fiscal cliff' is the biggest threat to the U.S. economy, as President Barack Obama and Congress wrangle over their differences.
Lagarde said on CNN's 'State of the Union' show that even though the US economy is creating jobs, the US debt is signficantly higher than in much of the Eurozone and cautioned against short-term measures. "The best way to go forward is to have a balanced approach that takes into account both increasing the revenue, which means raising tax or creating new sources of revenue, and cutting spending as well," Lagarde said.
The much-heralded 'fiscal cliff' is a combination of tax increases and spending cuts due in January instituted in a fiscal reform package passed by Congress several years ago.
Congressional Republicans are balking on plans to impose additional taxes on Americans making more than $250,000 per year, while Obama appears unwilling to impose cuts to social programs such as Medicare. There are now just three weeks from the January 1 deadline for a deal.
Lagarde warned the two parties against half-measures that would simply delay the fiscal cliff problem, as was done 12 months ago. A former finance minister of France, the acerbic Lagarde said "I don't think that is enough," with regard to the possibility of holding down tax rates on the US middle class, combined with a promise to examine areas in which cuts can be made later. "There is still that degree of uncertainty that fuels doubt, that prevents investors, entrepreneurs, households from making decisions, because they don't know what tomorrow will be," Lagarde said. "They know that a fix has been found for today. But there is still work to be done tomorrow and the day after tomorrow," she added.
The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1 percent. Lagarde predicted that going over the cliff would be disastrous. "If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero," she said.