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IMF Recommends Tax and Spend to Help US Economy

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Filed: Timeline

IMF backs more stimulus to help slow US recovery

The International Monetary Fund on Friday said more stimulus spending might be needed to aid a slow US economic recovery, wading into a toughly-fought political debate in Washington.

Warning that the "economic recovery has been slow by historical standards" and that "the outlook remains uncertain," the IMF's directors said more stimulus spending might be needed.

"Further decisive action is needed to achieve stable medium-term growth and limit risks of adverse international spillovers."

President Barack Obama has clashed with Republicans over the need for government to step in to help the ailing economy, making spending one of the toughest fought political battles in the US capital.

Obama's critics accuse the president of putting Americans' futures at risk by ballooning US debt through ineffective stimulus spending.

Obama was set to visit Detroit later Friday to tout a 64-billion-dollar bailout which kept the city's automakers afloat, promoting it as the type of "tough decision" needed to avoid economic depression.

But the IMF -- after earlier arguing strongly for the US to cut its debt levels -- said a bleak economic outlook could make further spending necessary, and could prompt a delay of planned budget cuts.

"Directors saw scope for a smaller up-front fiscal adjustment if downside risks materialize, complemented by measures to bolster medium-term credibility," the IMF said.

The comments comes against a bleaker economic backdrop than when the IMF last reported on the US economy in early July.

A key US government report Friday is expected to show the recovery is losing pace.

Analysts expect gross domestic product to have slowed to 2.5 percent in the period, down from 2.7 percent in the first three months of the year.

"Private demand has been sluggish, while the unemployment rate has receded only modestly from near post-Depression highs," the IMF said.

The IMF's top brass said the recovery was "still dependent on policy support" as economic "risks are elevated and tilted to the downside."

"Directors saw near-term trade-offs between supporting recovery and addressing long-term legacies," a statement said.

The IMF also argued that the Federal Reserves ultra-low interest rates could be sustained for longer given the low risk of inflation.

In an accompanying report, IMF staff said there was scope for "carefully targeted measures" to boost job creation.

Nearly one in ten American workers is currently without a job, and the ranks of the long-term unemployed are swelling monthly.

"The unemployment rate is higher than in any postwar period save a brief point in the 1980s, while unemployment duration, the percent of long-term unemployed, and the number of involuntary part-time workers are all at record highs," the IMF said.

The fund said unemployment would likely remain over nine percent in 2011, but that Obama's policies had had an impact.

"Overall, stimulus added over one percent to growth in 2009, with a smaller effect expected in 2010," the report said.

"Thanks to a massive policy response to the worst financial crisis since the Great Depression, the US economy is recovering, but further decisive policy action will be needed to address the policy challenges stemming from the crisis."


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