IMF chief warns against drastic US spending cuts

As debate rages over the U.S. budget and borrowing limit, International Monetary Fund Director Christine Lagarde Sunday warned U.S. spending cuts must not be too drastic or they could threaten global economic recovery. 

In an interview on NBC Sunday talk show "Meet the Press," Lagarde said serious consequences could flow from "a combination of the government shutdown for a period of time and, more seriously, more damaging, if the debt ceiling was not lifted with a degree of certainty and enough time so that people could, you know, sort of have the assurance that the economy was in good standing." 

"If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over. And we would be at risk of tipping, yet again, into recession," Lagarde said. 

She added that the U.S. must address its spending on social programs like Medicare and Social Security, but she cautioned against over slashing. "The point is not to contract the economy by slashing spending brutally now, as recovery is picking up,"  she said.

"The pace of consolidation has to be sensible in order to protect that growth which is generating jobs, and which is helping in all sorts of ways," Lagarde added. 

The U.S. must deal with "entitlement (spending) that will come up and haunt you in a few years' time," she said, but the government needs "a balanced approach." 

The IMF director said the U.S. economy is already showing "real improvement," evident in indicators from the housing sector to the automobile industry to banking and household spending. 

She added that it is crucial that the government work out a long term deal to end the shutdown and continue borrowing so that it does not default on its debt.

The Senate held a rare Sunday session to grapple with the budget impasse, with just five days remaining before the U.S. is set to reach the limit of its borrowing authority, putting it at risk of defaulting on its debt for the first time.

AFP