US Budget Deficits May Harm Global Growth

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Ballooning US budget deficits could seriously damage global growth as interest rates rise around the world, the International Monetary Fund has warned.

'The rest of the world is affected seriously by the US fiscal deficit,' IMF chief economist Raghuram Rajan told a conference which accompanied the release of some chapters of the semi-annual World Economic Outlook.

Mr Rajan said the US economic output would be reduced by about 3.75 per cent below its baseline and foreign growth would be reduced by 4.25 per cent below its baseline.

'When the US borrows money, it's going to withdraw from world savings, leaving less for the rest of the world. And to that extent, it's going to raise interest rates not just in the United States but in the rest of the world, and that's going to affect output throughout,' he added.

He also said the Bush administration's assumptions the US can halve its deficit in five years may be unrealistic. 'I think these are strong assumptions,' Mr Rajan said, 'It's within the realm of possibility, but I think that it would be good if there were stronger measures put in place so as to contain the deficit. …