US economy mending, oil prices a challenge: Geithner

NEW YORK (Reuters): The U.S. economy is growing again but faces tough challenges that call for action to create jobs and foster expansion, U.S. Treasury Secretary Timothy Geithner said on Thursday.

Geithner, speaking to the Economic Club of New York, singled out rising oil prices as a stumbling block for the economy because they force consumers to pay more for gasoline at the pump.

He said the economy was now more productive than it was before the 2007-2009 financial crisis but cautioned that confidence remains fragile.

“That is why it is so important that policy makers continue to work to get the economy growing faster in the short term and not shift prematurely to fiscal restraint,” he said.

“We can’t cut our way to growth. Severe austerity now would be very damaging,” he added.

He cited a number of factors that together mean Americans are facing “a dangerous and uncertain world,” including escalating energy costs.

“There is no quick and easy fix to this problem, but it reinforces the need for more progress to develop additional sources of energy of all forms,” Geithner said.

Earlier on Thursday, Reuters reported that Britain was ready to cooperate with the United States on a release of strategic oil stocks, likely within months.

Geithner noted that at the end of 2012, the country faces a simultaneous expiry of tax cuts and big across-the-board spending cuts that together would amount to about five percent of the country’s gross domestic product.

The prospect of such a blow to national output should be a strong incentive for lawmakers to reach some compromises on taxes and spending, he suggested.

Geithner said the Obama administration is aiming for a package of measures that includes some tax increases for wealthy Americans, though that is opposed by Republicans.

“If you do not raise revenues through tax reform, then you have to find another 1 percent of GDP or roughly 1.5 trillion dollars over 10 years in additional savings from defense, Social Security, Medicare, education or low income programs,” he said.

During a question period later, Geithner said the country now faces “stark choices” about the best course for boosting growth and getting deficits down.

He suggested there was “no alternative” to raising some taxes along with reducing spending and said reductions in some benefit programs were “manageable” if they were made over time.

People are going to be reluctant to see their benefits cut unless they think that those benefit cuts are not going to sustain tax rates we can’t afford,” he said.

“They go together. There’s no alternative. It’s going to have to happen and it’s better for us if it happened sooner and with design in it than happen too late without the opportunity for people to adjust,” Geithner added.

He noted that research shows that recoveries that follow financial crises tended to be “more tentative and uneven” and said it likely will take years to fully repair damage caused by the last one.

In response to questions, Geithner said that actions by the European Central Bank to keep markets liquid as well as actions by new governments in Italy and Spain had “substantially calmed the really acute financial tensions of the past 18 months” and reduced downside risks to the global economy.