IMF denounces US fiscal policy

The International Monetary Fund has denounced the tightening of US fiscal policy calling it "excessively rapid and ill-designed." The IMF also cut its forecast growth from 3 percent to 2.7 percent. The IMF said the rapid tightening of fiscal policy will take between 1.25 to 1.75 percentage points off growth this year.

By Robin Harding
June 14, 2013 7:08 pm
Financial Times

The International Monetary Fund denounced the tightening of US fiscal policy as “excessively rapid and ill-designed”, saying it will knock as much as 1.75 percentage points off growth this year.

In its annual economic check-up on the US, the IMF forecast growth of just 1.9 per cent this year and cut its 2014 outlook to 2.7 per cent from the 3 per cent it expected as recently as April.

It said that rapid tightening of fiscal policy – including tax rises and $85bn in across-the-board sequestration cuts to public spending – will take between 1.25 and 1.75 percentage points off growth this year.

“The IMF’s advice is to . . . slow the fiscal adjustment this year – which would help sustain growth and job creation – but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability,” said Christine Lagarde, IMF managing director.

The IMF’s comments suggest that US growth could have exceeded 3 per cent this year had Washington kept tax rates and spending steady. The Fund now expects sequestration to continue, undermining expansion through 2014.

“We had assumed that the sequestration would be phased out,” said Ms Lagarde. “In this latest forecast we assume that it will continue.”

The Fund also urged the US to adopt a more gradual fiscal consolidation “along the lines” of US President Barack Obama’s budget proposal. But no change is in prospect. At present the US public is feeling little pain from the cuts, and Mr Obama unwilling to cut healthcare and pension programmes.

“The automatic spending cuts not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth,” said the IMF.

Given its downbeat forecast, the Fund said it expects the US Federal Reserve to keep buying assets at a pace of $85bn-a-month for the rest of 2013, and slowly reduce its purchases in 2014.

That contrasts with Fed chairman Ben Bernanke’s remarks that the Fed could start to reduce asset purchases at one of its “next few meetings”, sparking global turmoil as markets fret about a likely reduction in the pace of US monetary easing.

“Unwinding monetary policy accommodation is likely to present challenges and this must be managed carefully,” Ms Lagarde said. “We are seeing clearly that communication will be key.”

The Fund added that, given the large amount of slack in the US economy, the Fed was right to continue quantitative easing, but warned of the dangers of a long period of low rates: “A long period of exceptionally low interest rates may entail potential unintended consequences for domestic financial stability and has complicated the macro-policy environment in some emerging markets.”

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