Ex-China Adviser Tells US to Get Fiscal House in Order
The U.S. Government’s high debt levels are a greater cause of concern than those of euro zone countries, says Li Daokui, a former Chinese central bank adviser, urging the world’ largest economy to push ahead with reforms to put its fiscal house in order.
“The public finance situation in the U.S. is worse than Europe. In Europe the leaders are cornered to do reforms. However, in the U.S., for the past one and a half years, there have been zero reforms in the area of public finance,” Li, currently a professor at Tsinghua University in Beijing, told CNBC on the sidelines of the World Economic Forum in the Chinese port city of Tianjin.
His comments follow a warning by ratings agency Moody's on Tuesday, which said the U.S. could lose its triple-A debt rating if next year's government budget talks do not yield policies that reduce the country's debt.
A mix of U.S. tax hikes and spending cuts - referred to as the "fiscal cliff" - are also set to come into force in January unless lawmakers reach a compromise for avoiding them.
Political deadlock over reducing the unsustainable federal government budget deficit - projected to hit $1.1 trillion this year - prompted Standard & Poor's to downgrade the country's credit rating by one notch to AA+ from AAA in August 2011.
A downgrade would have negative implications for China, which is estimated to have invested as much as 70 percent of its $3 trillion foreign exchange reserves in U.S. Treasurys, according to Reuters.
“My biggest worry is when the Europeans are done with their reforms, the world’s financial sector will focus their attention on the U.S. numbers…and their numbers aren’t as pretty as the Europeans,” said Li, who was as an adviser to the People’s Bank of China until March this year.
Discussing whether there is need for further monetary stimulus to prop up growth in the world’s largest economy Li, says, “simply printing money” will only delay the necessary reforms.
The U.S. Federal Reserve which is meeting over Wednesday and Thursday is widely expected to embark on an easing program.
Li said U.S. policymakers need to make a “hard” decision to either raise taxes or substantially cut entitlement expenditures.
“I do hope the next president will pick up on the issue and do it right away, otherwise the world economy will suffer,” he said.
By CNBC's Ansuya Harjani