US Budget Cuts “Excessively Rapid and Ill-Designed”: IMF

International Monetary Fund Managing Director Christine Lagarde speaks during a news conference at IMF headquarters in Washington, D.C., June 14, 2013.

June 17, 2013

The International Monetary Fund on Friday called for the repeal of sweeping U.S. government spending cuts that kicked in earlier this year, denouncing it as “excessively rapid and ill-designed”, as it cut the 2014 growth forecast for the world’s biggest economy.

In its annual report on the U.S. economy, the IMF forecast growth of 1.9 percent for 2013, but said it could be as much as 1.75 percentage points higher without the rapid tightening of fiscal policy, also known as sequestration, which began in March.

While the recovery has been “tepid”, it said the overall fundamentals are getting better, pointing to a rebound in housing prices and construction activity, stronger household balance sheets, an improvement in the labour market, and strong corporate profitability.

For 2014, the Washington-based organisation lowered its economic growth forecast to 2.7 percent, below its 3 percent forecast published in April. “We had assumed that the sequestration would be phased out,” when the prior forecast was made, explained IMF Managing Director Christine Lagarde.

Related: Sequester Puts US Growth at Risk: IMF

Related: US Deficit Shrinking Faster Than Expected: CBO

Criticising the near-term budget belt-tightening as “excessively rapid and ill-designed”, the IMF reiterated that the U.S. deficit reduction programme should be “replaced with a back-loaded mix of entitlement savings (related to healthcare and pensions) and new revenues, along the lines of the administration’s budget proposal.”

While the Fund said total debt across all levels of government would likely decline after 2015, public finances are nevertheless on an unsustainable path due to an aging population and higher spending on health care.

Criticising the U.S. for not doing enough to cut its long-term budget deficits, Lagarde said:

“Now our advice is not just to slow down (budget cuts). Our advice is also to hurry up: hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.”

Related: US Budget Deficit to Fall Below $1 trillion This Year: Report

Warning that the country still faces downside risks to its recovery, the IMF also recommended that the Federal Reserve continue its $85 billion monthly bond-buying programme through at least the end of the year.

Known as quantitative easing, the IMF acknowledged that the Fed’s actions has flooded the market with cheap debt and increased the risk of new financial problems, but insisted the benefits to the U.S. and global economy have so far outweighed the costs.

“The Fed should continue its preparations for a smooth exit. The highly accommodative monetary policy stance has provided important support to the US and global economic recovery,” the IMF said.

“Effective communication on the exit strategy and careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive rate volatility as the exit nears,” it added.

Speculation over when the Fed might start to pare back its bond buying has roiled financial markets recently. Fed Chairman Ben Bernanke stoked market speculation last month when he said a decision to pare the Fed’s current pace of asset purchases might happen at one of the Fed’s “next few meetings” if the economy looked set to maintain momentum.

Related: Fed to Maintain Stimulus Amid Budget Cuts

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