The International Monetary Fund (IMF) urged the US to repeal the massive federal budget cuts, also known as the “sequester”, judging them as "excessively rapid and ill-designed". It said the deficit reduction program would be a hindrance to growth this year.
The IMF forecasts growth in the US economy to be 1.9% for 2013, but said it could be as much as 1.75 % higher without the rapid tightening of fiscal policy.
"The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said, in its annual report on the world's biggest economy.
According to the IMF’s report, the automatic spending cuts (“sequester”) not only exerts a heavy toll on short-term growth, but the "indiscriminate reductions" in education, science, and infrastructure spending could also reduce medium-term potential growth. It stated that the cuts should be replaced with a “back-loaded mix of entitlement savings and new revenues”. The IMF continued, warning the expiration of the payroll tax cut and the increase in high-end marginal tax rates also cause some further drag on economic activity.
The IMF recognized the recovery, calling it "tepid" with overall fundamentals had been gradually getting better. It, however, remains concerned about the impact of the agings population and the increases in health care costs on spending, stating that “public finances remain on an unsustainable path over the longer term”. It noted, while the general government deficit has more than halved since 2009 and the budget deficit will continue to shrink over the next few years, however “the longer-term debt profile remains unsustainable”. In particular, spending on major health care programs and Social Security, absent additional reforms, is expected to increase by 2% over the next decade. Furthermore, interest outlays are projected to increase as interest rates gradually return to neutral levels. The IMF warned, “these factors would cause the budget deficit to widen and put the ratio of public debt to GDP again on an upward path—and from a relatively high starting point”. All of which does not bode well for the long-term prospects for the US Economy.
Given this is so obvious to the IMF and to many economists and much of the general population, why does the US government continue on a path that is not sustainable? Recall the definition of insane, which is doing the same things over and over, and expecting different results.
Bottom line, the IMF's advice is to slow down, but hurry up, i.e. slow the fiscal adjustments this year, but hurry up with implementing a medium-term road map to restore long-run fiscal sustainability. Someone please set the alarm clock on Pennsylvania Ave.
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