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IMF urges U.S. lawmakers to remove 'fiscal cliff'

WASHINGTON (MarketWatch) -- A failure to avoid the "fiscal cliff" could slash the U.S. growth rate to under a 1% annual rate and risk harming the global economy, the International Monetary Fund said in a report released Tuesday.

The fiscal cliff is Washington shorthand for current tax and spending plans, enacted in law when the debt ceiling was narrowly passed last summer, that would shrink the deficit by around 4% of gross domestic product in 2013.

These policies "could reduce growth to well below 1%, with negative growth early next year and significant negative repercussions on an already fragile world economy," the IMF warned.

Lawmakers should replace the fiscal cliff with a program of small deficit reduction in the short-term with a longer-term fiscal sustainability program, the IMF said.

A small deficit reduction means cuts totalling about 1% of gross domestic product in calendar year 2013, IMF Managing Director Christine Lagarde said at a press conference.

Growth in the largest global economy is expected to average 2% in 2012 and 2.25% in 2013, and downside risks have intensified, the IMF said

With interest rates near zero since December 2008 and the federal budget needing to be trimmed, U.S. officials have "limited space to act," said Lagarde. But they must use it, she said.

Congress must also quickly pass another increase in the federal debt ceiling that is expected to be needed in early 2013, the IMF said. The market disruption and uncertainty that surrounded the last debt ceiling hike in August 2011 must be avoided, the agency said.

The Treasury Department had a very limited public reaction to the IMF report, issuing a brief statement only noting that it had been released.

Outside of fiscal policy, the U.S. remains vulnerable to contagion from the euro-area debt crisis, the report concluded.

The Fed has room for further easing should the outlook deteriorate, the IMF said.

Fundamentals suggest the dollar is modestly overvalued, the report concluded.

The IMF backed more aggressive steps to aid the housing market, including measures to convert foreclosed properties into rental units and programs to allow more homeowners to refinance at current low interest rates.

Congress should also reconsider its opposition to legislation dubbed "cram down" that would allow bankruptcy judges to modify mortgages and help troubled homeowners reduce the principal they owe on the loan.