The United States needs to raise taxes and cut spending to address the looming fiscal cliff, IMF chief Christine Lagarde said on Sunday, warning that anything less would undermine economic confidence.
With President Barack Obama and Republican lawmakers stuck in an apparently ideological battle on how to address the nation's ballooning deficit by the end of the year, Lagarde said the cliff remained the biggest threat to the economy.
Speaking on CNN's State of the Union talk show, she said that although the US economy was creating jobs, American debt was still higher than in much of the eurozone and cautioned against more half-baked, short-term measures.
"The best way to go forward is to have a balanced approach that takes into account both increasing the revenue, which means raising tax or creating new sources of revenue, and cutting spending as well," Lagarde said.
The so-called fiscal cliff refers to a combination of severe tax increases and spending cuts due in January.
Obama won November's presidential election on a platform of tackling the nation's deficit and debt by raising taxes for the wealthiest Americans, but Republicans are opposed to higher rates being placed on anyone.
But with the president unwilling to impose the level of cuts to social spending programs such as Medicare that the Republicans want, there is deadlock just three weeks from the January 1 deadline for a political deal.
Lagarde, France's former finance minister, warned both sides against making a false compromise that would kick the fiscal cliff problem down the road temporarily, as was done 12 months ago.
"I don't think that is enough," she said, when asked if an agreement to hold tax rates on the US middle class, combined with a promise to examine areas in which cuts can be made later, would be enough to preserve economic confidence.
"There is still that degree of uncertainty that fuels doubt, that prevents investors, entrepreneurs, households from making decisions, because they don't know what tomorrow will be," Lagarde said.
"They know that a fix has been found for today. But there is still work to be done tomorrow and the day after tomorrow," she added.
The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1 per cent, and Lagarde reiterated that the implications of going over the cliff would be precipitous.
"If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero," she said.