US 'endangering World Economy'

The International Monetary Fund last night warned that the gaping US budget deficit, ballooning trade imbalance and falling dollar were posing a serious threat to the health of the global economy.

It sounded the alarm in a critical report on US fiscal policy, which rounds on the Bush administration's crowd-pleasing tax cuts last year. The US is facing a record-breaking budget deficit, expected to exceed $400bn (£222bn) this year and the IMF urged Washington to get its house in order by raising taxes and cutting spending.

Debt is expected to reach 40% of the US economy, which the report described as "an unprecedented level of external debt for a large industrial country" that would push up global interest rates and slow growth.

The US appetite for borrowing would cause the weakened dollar to plunge further hurting other economies still trying to get back on their feet. The dollar has lost 20% of its value against the euro in the past 18 months. It said there was a diminishing appetite among foreign investors to hold US assets.

"This trend of deficits is likely to continue to put pressure on the US dollar," it said. "Although the dollar's adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored."

The fall had already "complicated" macroeconomic policy in countries such as Japan and those in the eurozone.

The IMF also said the deficits could deter private investment within the US, hurt long term productivity growth and endanger social security programmes.

Washington officials dismissed the report as alarmist and said the president had already promised to cut the deficit in half over the next five years.