IMF: US budget cuts 'ill-designed'

Protests against the sequester Federal workers have protested against the budget cuts, known as sequestration

The International Monetary Fund (IMF) has urged the US to repeal the huge federal budget cuts introduced this year, denouncing them as "excessively rapid and ill-designed".

It said the deficit reduction programme would be a drag on growth this year.

It forecast growth of 1.9% for 2013, but said it could be as much as 1.75 percentage points higher without the rapid tightening of fiscal policy.

But the IMF added that the overall US economy was improving.

While the recovery had been "tepid", it said the overall fundamentals had been gradually getting better.

It pointed to a rebound in house prices and construction activity, stronger household balance sheets, an improvement in the labour market, and strong corporate profitability.

'Slow down, but hurry up'

"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.

Not only would spending cuts hurt in the short term, but "indiscriminate" reductions in education, science and infrastructure spending could reduce potential growth in the medium term, it said.

"These cuts 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."

"The IMF's advice is to slow down, but hurry up: meaning 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," managing director Christine Lagarde said.

Smooth exit

The Fund's forecast for growth of 1.9% this year would mark a slowdown from the 2.2% growth the US recorded in 2012.

But it expects a pick-up to 2.7% in 2014.

It expressed support for the Federal Reserve's $85bn-a-month (£54bn) quantitative easing (QE) programme, and said it should continue with the programme until at least the end of 2013.

The Fed uses QE, a policy of buying bonds, to increase the money supply and improve liquidity in the financial system in the hope of sparking economic growth and supporting employment.

There has been recent concern about when the stimulus measures will be withdrawn, sending jitters through the world's financial markets.

"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.

However, it warned that unwinding monetary policy accommodation was likely to present challenges and said a long period of low interest rates could have unintended consequences and "sow the seeds of future financial vulnerabilities".

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