WASHINGTON – The International Monetary Fund urged U.S. lawmakers Wednesday to raise the nation's borrowing limit, warning 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.
A disagreement over how to rein in the federal budget deficit has kept Congress from raising the borrowing limit. Republicans want President Barack Obama and Democrats to first agree on spending cuts equal to any increase in the borrowing limit. Democrats say any deficit-reduction deal must also include some tax increases.
The IMF warned in its annual report that rising U.S. budget deficits pose a risk to the economy. But it advocated 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.
John Lipsky, acting managing director of the IMF, said a default on the debt "would have very serious and far-reaching consequences." But he added that the fund is confident the two sides will reach a deal.
Separately, President Obama insisted Wednesday that eliminating selected tax breaks for oil companies and the super-wealthy must be part of any deficit reduction plan. He also said that a bipartisan agreement is possible to cut deficits, raise the government's debt limit and avert a threatened financial crisis.
Obama said both Democrats and Republicans must be prepared to "take on their sacred cows" as part of the deficit-reduction negotiations.
Republicans say they will not support any proposal that raises taxes.
Treasury Secretary Timothy Geithner strongly criticized a Republican proposal that would prioritize interest payments on the nation's debt and cut spending rather than raise the borrowing limit.
Geithner said in a letter addressed to Sen. Jim DeMint, a South Carolina Republican, that the idea is "a radical and deeply irresponsible departure" from previous practices by presidents of both parties. The letter was copied to 16 other Senate Republicans, including Majority Leader Mitch McConnell.
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 percent this year and 2.7 percent 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.
Lipsky noted that the fund's forecast for this year included an expectation that growth would pick up in the second half of this year, as gas prices have retreated from their peak last month of nearly $4 a gallon. And disruptions in auto manufacturing stemming from Japan's March 11 earthquake, which reduced the availability of key parts, is also likely to fade.
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 percent 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 & 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.
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AP Writer David Espo contributed to this report.
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