The White House plan to partially freeze government spending is just "spare change" compared to a budget deficit of more than $1 trillion and eventually the US will have to raise taxes, economist Nouriel Roubini of Roubini Global Economics told CNBC Wednesday.
President Barack Obama proposed a five-year freeze on non-discretionary defense spending for five year to lower the deficit by about $400 billion.
But more actions will be needed to seriously tackle the deficit, Roubini said at the World Economic Forum in Davos, Switzerland.
The government will have to work on reform on entitlement programs like Social Security and "also eventually raise taxes for both the rich and the middle class," he said.
Until that happens, the Chinese will have to continue to buy US Treasurys, because "there is not alternative for them" and if they stopped their currency would appreciate sharply and hurt their exports and growth, Roubini said.
"Whether the Chinese like it or not, for the time being they will have to fund the United States, he added.
UK Facing a Double Dip
Across the pond, the UK economy is facing the double blow of a cut in spending and higher inflation, Roubini said.
The cost of fiscal austerity (on growth) was always going to be significant in the short run, but the spike in prices means that the Bank of England can't help the economy by initiating more quantitative easing.
With contraction already happening in the fourth quarter, "contraction could become worse in the first half of the year," he said.