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IMF warns about US economy

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IMF Says U.S. Faces Increased Risks

By THE ASSOCIATED PRESS

Filed at 6:27 p.m. ET

WASHINGTON (AP) -- The U.S. economy is facing new risks because of the recent stock market turbulence and accounting scandals, the International Monetary Fund said Monday in issuing its annual assessment of economic conditions in the world's biggest economy.

The 184-nation international lending organization said the U.S. recovery from last year's recession should continue, but it cautioned that the risks going forward have increased given the huge drop in the stock market that occurred in July and new uncertainties in the minds of investors caused by corporate accounting scandals.

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``While the outlook is still broadly favorable, the downside risks have intensified,'' the IMF said in its report, which was issued on a day when Wall Street took another beating. The Dow Jones industrial average fell by 270 points, its third straight triple-digit loss.

The IMF urged U.S. policy-makers to consider rolling back some of the future tax cuts in an effort to keep budget deficits under control and said the administration's current forecasts of when the federal budget will return to surpluses could prove too optimistic.

That recommendation was certain to provide ammunition for Democratic critics of the administration's economic policies, who have argued all year for a reduction in future tax cuts, which they contend will mainly benefit the very wealthy, because of the deteriorating budget situation.

The IMF report on the U.S. economy was issued by the agency's 24-member board of directors, which reviewed recommendations put forward by IMF staff economists. The reports, done for all IMF member countries, are part of the agency's surveillance of the global economy.

``Nearly all directors suggested that the pending reductions in marginal income taxes also need to be reconsidered'' in light of the deteriorating budget situation, the IMF said. The report said that some executive board members also recommended increases in U.S. energy taxes as a way to reduce America's use of energy reserves.

The $1.35 trillion tax cut approved by Congress last year has been a major debating point in Congress this year with Republicans pushing to make the cuts, which are due to expire in 2010, permanent.

The IMF report noted new administration forecasts that have scaled back expected surpluses in coming years. In its latest outlook issued in July, the administration predicted the deficit would be $165 billion for the current budget year, which ends Sept. 30, and forecast that surpluses will not return until 2005.

IMF economists warned that this assessment may prove too optimistic. In any event, the agency said the administration and Congress should be looking for ways to bolster future surpluses in light of the looming demands that will be imposed with the retirement of the baby boomers.

The report was also critical of the recently passed farm bill, which sharply boosts farm subsidy payments, saying this would also be a drain on the budget in coming years and undermine the U.S. position in global trade talks that all farm subsidies should be dramatically scaled back.

The IMF predicted that the U.S. economy would grow this year by 2.5 percent, up slightly from the outlook three months ago contained in its ``World Economic Outlook.'' It cut the forecast for growth in 2003 to 3.25 percent, down from 3.4 percent three months ago. And the agency cautioned that it would probably reduce the U.S. forecast even further when it releases its next global outlook in September in advance of its annual meeting.

``The recent weakness of equity markets, which has been exacerbated by corporate accounting scandals, could pose a risk by undermining consumer and business confidence,'' the IMF concluded.

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