The International Monetary Fund has warned the United States that it faces a 'severe shock' if the country's debt ceiling is not lifted soon.
But, with US politicians battling over a plan to slash the country's deficit, the IMF executive board called on US authorities to only gradually reduce spending, to avert 'a disruptive loss in fiscal credibility'.
'The federal debt ceiling should be raised expeditiously to avoid a severe shock to the US economy and world financial markets,' IMF economists said in a report on the US economy.
Democratic and Republican politicians were locked in negotiations today trying to break a prolonged deadlock over raising the government's $14.3 trillion borrowing cap, linked to a long-term plan to reduce a big budget deficit.
President Barack Obama said this evening that the US could not deal with its budget problems through spending cuts alone. Republicans have been opposing tax increases.
The debt limit was reached in mid-May and the US Treasury warns that it may be unable to pay its obligations by August 2.
In an annual review of the world's biggest economy, the IMF economists criticised deficit-reduction plans proposed by the Obama administration and the Republican majority in the House of Representatives, citing a tepid economic recovery.
'The official deficit reduction proposals could be too front-loaded given the cyclical weakness and, at the same time, insufficient to stabilise the debt by mid-decade.'
The IMF projected public debt at 99% of gross domestic product this year, rising to a ratio of 103% in 2012, higher than its June estimates. It called for a medium-term plan which would include raising revenue and addressing long-term spending pressures.
'The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures,' the Washington-based institution said in a separate statement on the executive board's discussions of the review. Tax expenditures refer to tax breaks or allowances.
Executive directors called for the US to gradually unwind the extraordinary support provided the economy to deal with the 2008-2009 financial and economic crisis.
