The world's leading economies will give themselves more wiggle room to meet their own targets for cutting budget deficits rather than risk aggravating a slowdown in many countries, chief among them the United States. Policymakers from the Group of 20 countries are worried that their target to halve the budget shortfalls of advanced economies by the end of next year might hurt the struggling global economy.
"We will ensure the pace of fiscal consolidation is appropriate to support growth," said a draft communique, drawn up for top G20 finance officials meeting on Monday in Mexico. The target was agreed by G20 leaders at a summit in Toronto in 2010, when the global economy seemed to be on the road to recovery from the financial crisis in the previous two years.
It now looks out of reach for many economies, including the United States, as growth has slowed. The US budget gap surpassed $1 trillion for the fourth year in a row in the fiscal year 2012. The deficit was equivalent to 7.0 percent of the country's economic output.
While the United States needs to bring its deficits under control, many G20 countries want it to avert a barrage of tax hikes and spending cuts from January 1 that were pencilled in last year to show the country could tackle its fiscal problems. The draft communique said G20 members would ensure that public finances are on a sustainable path, in line with the medium-term commitments made in 2010. At the Toronto summit, G20 leaders pledged to stabilise public debt by 2016 in most advanced countries as well as halving deficits by the end of 2013.
European policymakers have led the way in pressing the United States to act decisively to steer away from the fiscal cliff which they see as the biggest short-term threat to global growth. "The clock is ticking, the cliff is getting closer and closer. It is a question of less than two months and accidents can happen," a senior G20 official said, although he added the group is confident that Congress will find a bi-partisan solution.
Chile's finance minister, Felipe Larrain, also said there was an assumption that a deal would - and must - be found. "If we're not able to resolve the cliff, that could be the tipping point for a much more complicated scenario in the world economy," he told Reuters.
The draft communique said the United States "will carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-term path while avoiding a sharp fiscal contraction in 2013." A senior European official attending the two-day G20 meeting of finance ministers and central bank governors in Mexico City said the G20 would aim to complete a new set of targets when the group's policy makers next meet in Moscow in February. A draft communique being readied for the G20 policymakers said there were elevated risks facing the global economy, including Europe's crisis and potential problems in Japan.