WASHINGTON -- The International Monetary Fund on Friday urged U.S. officials to scale back its automatic federal spending cuts, warning that they were “excessively rapid and ill-designed” and were hurting the nation’s economic recovery
“The sequester cuts not only reduce growth in the short term, but they also hurt the most vulnerable,” IMF Managing Director Christine Lagarde told reporters in releasing the organization’s annual assessment of the U.S. economy.
The $85 billion in spending cuts this year -- the first installment of nearly $1.2 trillion in reductions over the next decade -- were too much for the still-recovering economy, the IMF said.
Because it appears Congress won’t repeal the cuts, the IMF lowered its 2014 growth forecast for the U.S. to 2.7% from an earlier projection of 3%. Growth this year is forecast at 1.9% because of “the excessively rapid pace of fiscal deficit reduction,” the IMF said.
The IMF also urged Congress to raise the debt limit promptly and cautioned the Federal Reserve to be careful in scaling back its stimulus efforts.
Despite speculation the Fed could start reducing its $85 billion in monthly bond purchases as soon as this month, Lagarde said the IMF assumed that tapering would not begin until next year and the phase-out would be “very gradual.”
“The unwinding, when it comes, should be very carefully managed using both communication and all the other tools available,” Lagarde said. “It has to be mindful of its consequences at home and the potential spillover consequences abroad.”
Lagarde said the U.S. economy was improving, boosted by a resurgent housing market and aided by the Fed’s easy-money stimulus policies.
“We see that the recovery in the United States of America is gaining ground and becoming more durable,” she said. “However, the economy has a ways to go before it returns to full strength.”
The automatic budget cuts, which kicked in on March 1, along with higher taxes, have led the U.S. budget deficit to decline too rapidly this year, the IMF said.
At the same time, Washington policymakers were not doing enough to address long-term fiscal issues, such as reforming entitlement programs.
That led Lagarde to deliver the incongruous-sounding advice of “slow down but hurry up.”
U.S. officials should slow the pace of deficit reduction by replacing the sequestration cuts with “a more balanced and gradual pace of fiscal consolidation,” she said.
And policymakers should move more quickly to adopt a back-loaded plan to lower the growth in entitlement spending over the medium-term and increase revenue, possibly through an overhaul of the tax code, the IMF said.
“You might ask, ‘What’s the urgency? The problem is down the road,’” Lagarde said. “If those measures are taken early on, they won’t be as painful.”