WASHINGTON, Dec 14 (Reuters) - The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday.
Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.
Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country's standard of living.
"We will be less free if we don't tackle this," said Jim Nussle, a Republican member of the commission who earlier served as a White House budget director and chairman of the budget committee in the U.S. House of Representatives.
The 34-member commission published its report as Congress was poised to raise the debt limit from its current $12.1 trillion level to allow the government to continue operating.
The national debt has more than doubled since 2001, thanks to the worst recession since the 1930s, several rounds of tax cuts and wars in Iraq and Afghanistan.
A looming wave of retirements over the coming decade is expected to make the situation worse.
The national debt currently accounts for 53 percent of GDP, up from 41 percent a year ago. That's likely to rise to 85 percent of GDP by 2018 and 200 percent of GDP by 2038 unless dramatic changes are made, the commission said.
The commission did not issue specific prescriptions but said tax increases and spending cuts would probably be needed.
It said Congress and the Obama administration should set specific targets each year, with automatic spending reductions and tax increases kicking in if they are not reached.
The Democratic-controlled Congress is unlikely to fix the problem on its own given the highly partisan atmosphere, commission members said.
"You've got to have a few Republican votes, and there have been none. And there has been no possible way in the current political system yet to find that sensible center," said former Democratic Representative Charlie Stenholm.
The commission backed the creation of an outside commission, similar to one used to close miliary bases, to create the necessary political cover.
Such a proposal is included in a crush of year-end legislation that could clear Congress this week but it is opposed by many key Democrats.
The United States must act to ensure that it does not join Dubai, Greece, and other countries that risk losing the confidence of investors, the commission said.
"It's imperative that we take action before the financial markets force us to," said Douglas Holtz-Eakin, a former Congressional Budget Office director who advised Republican John McCain's presidential campaign last year.
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