Singapore (AFP) Nov 15, 2009
President Barack Obama on Sunday vowed to take "serious steps" to cut the huge US budget deficit, which is complicating America's economic recovery hopes and threatening his own political prospects.
Obama told Asia-Pacific leaders at a summit here that he intended to curtail US government debt, with the White House forecasting a whopping deficit of 1.502 trillion dollars in fiscal 2010.
He accompanied his pledge with a call on regional leaders to refashion their export-led economies to rebalance world growth and forestall future crises.
"As the economy recovers, I intend to take serious steps to reduce America's long-term deficit," Obama said at the Asia-Pacific Economic Cooperation (APEC) forum, in remarks released by the White House.
"Debt-driven growth cannot fuel America's long-term prosperity," he said.
Obama's Republican critics, and some conservative Democrats, have called on the president to rein in spending on huge programmes such as health care and climate change to avoid inflating the sky-high deficit.
The potent political charge that the White House is piling up debt that will bankrupt future generations of Americans will be a prime bone of contention in mid-term congressional elections next year.
Obama pointed out to the 20 other APEC leaders that he had inherited a deficit already above a trillion dollars from former president George W. Bush.
He also argued that he had little choice but to mandate high levels of deficit spending to stimulate the economy, amid the deepest economic crisis in decades.
Obama warned Asian leaders that he was seeking changes to the way regional powers underpin their own growth by profiting from US consumption, in a rebalancing of the global economy.
"We cannot follow the same policies that led to such imbalanced growth," he said, highlighting the severe deficits run up by the United States.
"If we do, we will continue to drift from crisis to crisis, a failed path that has already had devastating consequences for our citizens, our businesses, and our governments."
There has also been concern over the state of US finances from China, whose President Hu Jintao attended the APEC summit in Singapore.
China said last month it was encouraged by signs of an economic recovery in the US, but hoped it would keep its budget deficit to an "appropriate size" to stabilise the US dollar exchange rate.
Beijing is worried that US deficit spending will threaten the assets of China, which invests more than half of its foreign currency reserves in American bonds and is the United States' largest creditor.
The US government announced last month that it had closed its 2009 fiscal year with a record budget deficit of 1.417 trillion dollars, up 962 billion dollars from the prior year.
The huge gap stemmed from declining revenues and a massive boost to spending in a 787-billion-dollar stimulus plan designed to jolt the world's largest economy from its prolonged recession.
Concerns over the deficit underscore a fundamental tension undercutting Obama's presidency in its first year -- the extent to which he is attempting sweeping political change at a moment of historic financial peril.
Many economists say high deficits during economic crises are acceptable to fuel government spending to stimulate growth.
But long-term deficits can result in high interest rates, making it much harder for consumers to finance outlays such as new homes and cars.
earlier related report
IMF chief Dominique Strauss-Kahn ruled out a "double-dip" recession in the United States once a huge dose of stimulus spending runs out. But he said the world economy would struggle to meet pre-crisis levels of growth for now.
The sobering assessment of the fragile status of world recovery came from top economic officials on the eve of an Asia-Pacific summit to be attended by US President Barack Obama, Chinese President Hu Jintao and 19 other leaders.
World Bank president Robert Zoellick said the spectre of inflation, and doubts over when massive government stimulus packages can be safely unwound, were other real threats.
"The reason I am flagging this issue is that we are in the stage of recovery where confidence is very important," he said at a business forum ahead of the weekend summit of the Asia-Pacific Economic Cooperation (APEC) group.
"If you have asset bubbles that are not properly dealt with, you could again undermine confidence in 2010, which is the year I am more concerned about."
Property and share prices have begun to froth again in Asia, but central banks have generally kept their interest rates low in line with the US Federal Reserve's ultra-lax monetary policy.
Although the US economy has returned to growth, unemployment nationally has breached 10 percent and analysts say it is set to rise further.
Once the saviour of the world economy, the US consumer cannot now be relied on and it is time for Asian exporters to remodel their economies to foster domestic demand, both Zoellick and Strauss-Kahn said.
Vowing to maintain China's stimulus programmes, Hu told the business forum: "The profound impact of the financial crisis is still evident and the world economic upturn is not yet firmly established.
"The international financial crisis has given rise to trade and investment protectionism of various forms," he added, delivering a warning against new trade barriers that was echoed by several other APEC leaders.
Russian President Dmitry Medvedev, who was to arrive in Singapore on Saturday, urged APEC nations to limit state bailouts or risk creating "hothouse conditions for unprofitable businesses" that would only harm growth overall.
The APEC leaders are expected to call for government spending packages to remain in place until private-sector demand is strong enough to take over as the motor of growth, according to a draft communique seen by AFP.
Much of the Obama administration's 787-billion-dollar package is still to feed into the world's largest economy, but Strauss-Kahn said the United States was unlikely to hit the rails once the spending runs out next year.
"Our forecast is not only for the United States but also for the rest of the world that 2010 will be the year of recovery," the IMF chief said.
But he cautioned that recovery would be "fragile" and "sluggish", particularly in employment.
Zoellick said that persistently high unemployment, particularly in developed nations, would create "second-wave" damage for banks just as they return to profit.
The World Bank president also warned of signs that crisis-hit countries were attempting to shore up their economies by reverting to protectionism.
"By and large it's a low-grade fever, it's not a full influenza," he said.
"But if you've got large-scale unemployment one has to be careful, because political leaders are going to be under pressure to do something and unfortunately one of the things they often are tempted to do is to raise barriers."
Hong Kong chief executive Donald Tsang said that in light of the downturn, "now at least, everyone has a better experience of how much prosperity suffers when trade suffers".
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