G8 fears US 'fiscal tightening'

Finance ministers from the world's largest economies have called on countries to reject protectionism and currency manipulation despite a raft of economic problems that include the US deficit.

Meeting in Mexico City a day before the US elections, the G20 ministers issued a statement saying the United States faced "a potential sharp fiscal tightening".

"The United States will carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-run path, while avoiding a sharp fiscal contraction in 2013," they said.

Other delegates at the meeting expressed similar concerns.

"Whoever is going to be elected or re-elected tomorrow (in the United States) will be faced with that challenge, and will have to tackle that issue upfront, very shortly," said International Monetary Fund managing director Christine Lagarde.

"First and foremost the US leadership needs to address quickly the so-called fiscal cliff and the debt ceiling, those two risks ... are clearly factors of uncertainty, not only for the US economy but also for the global economy."

Agustin Carstens, the governor of Mexico's central bank, said the G20 countries told the United States how important the issue was for continuing the world economic recovery.

While much of the attention at the two-day meeting focused on Europe's continuing financial crisis, EU officials were focusing the heat on the US and other problems.

"The risks have decreased dramatically in the European area," said Olli Rehn, the EU's financial and monetary affairs commissioner. "There is agreement that solving the Euro-area crisis won't be enough for the world economy to have higher growth ... risks do also stem from the US fiscal cliff, the high level of commodity prices, and the slowdown in emerging economies."

Despite the challenges, the G20 statement said: "We are firmly committed to open trade and investment, expanding markets and resisting protectionism in all its forms."

In apparent reference to concerns that China or other countries might seek to combat a downturn in growth by manipulating currencies, the G20 officials wrote: "We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, avoid persistent exchange rate misalignments and refrain from competitive devaluation of currencies."

Earlier, Germany and the UK proposed that the world's biggest economies form a common front against tax evasion related to internet commerce and other revenue-shifting schemes, and said they received strong support at the meeting of officials from the G20 nations.

"We've just been discussing it in the meeting we had. There was widespread support," Chancellor George Osborne said.

Mr Osborne and German finance minister Wolfgang Schauble said they did not want to scare businesses away, but companies must pay what they owed.

"International tax standards have had difficulty keeping up with changes in global business practices, such as the development of e-commerce," the two said in a joint statement.

"As a result, some multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated."

They said a united approach among the world's largest economy is the best way to fight evasion, without penalising any single country.

"It's very important that we as individual countries don't price ourselves out of the world economy," Mr Osborne said.

They did not mention which specific accounting procedures might be targeted or what enforcement measures were proposed, but Mr Osborne said the goal was "acting together as the world's largest economies to make sure that international tax standards keep pace with international business".

They said the proposal had been forwarded to the Organisation for Economic Co-operation and Development for study, and that team would report back to the Group of 20 finance ministers' next meeting, to be held in Moscow in February.

Both ministers said they also support the OECD's own "tax-base erosion and profit-shifting" initiative, focused on the same problem.

"What we are doing today is starting a process," Mr Osborne said.

The European financial crisis and the US deficit had dominated the G20 agenda.

Yesterday Spanish economy minister Luis de Guindos said none of the group's ministers had pressured his country to ask for a bailout package, which could come with onerous conditions, and said Spain would not accept any such pressure.

Despite weakness in its banking sector and pressure on government-bond interest rates, Mr De Guindos said Spain "has relatively good liquidity" to see out the year.

Spanish prime minister Mariano Rajoy said last week that he saw no immediate need to ask for help, but did not rule it out in the future.

The two-day closed-door meeting comes just ahead of US elections and lacks key players such as US treasury secretary Timothy Geithner.

Mexican treasury secretary Jose Antonio Meade said over the weekend that the ministers plan to discuss "the fiscal cliff" in the United States, where a package of spending cuts and tax increases is set to take effect unless Congress acts by January 1.

The G20 brings together the world's principal economies and important emerging ones, including the United States, the European Union, China and Brazil.