The US federal budget cuts are an inappropriate measure that will weigh on potential growth, IMF chief Christine Lagarde said on Sunday, urging Washington to present “credible” fiscal plans. Washington enacted across-the-board federal government spending cuts, known as sequestration, in March because Congress could not agree on an alternative.
It has meant everything from furloughs for air traffic controllers to fewer planes for the US Navy to smaller subsidies for farmers.
“The budgetary procedure that is in place in the United States, which leads to a budgetary adjustment, seems to us absolutely inappropriate...because it blindly affects certain expenditures that are essential to support medium and long term growth,” Lagarde told an economists’ conference in Aix-en-Provence, southern France. Her comments echoed those last month from the IMF itself, which said: “The deficit reduction in 2013 has been excessively rapid and ill-designed.”
In its annual check of the health of the US economy, the IMF forecast economic growth would be a sluggish 1.9% this year. The IMF reckons growth would be as much as 1.75 percentage points higher if not for the rush to cut the government’s budget deficit.
While the budget cuts that took hold on March 1 do not appear to be hitting government payrolls directly so far, some economists said they were weighing on private employers and helped explained a sharp slowdown in hiring in the health care and social assistance sector. Lagarde urged Washington — as well as Tokyo — to come up with fresh plans to cut their debt.
Japan has pledged to halve the primary deficit — the budget excluding new bond sales and debt servicing — by March 2016 and bring it to surplus by March 2021 to contain its ballooning public debt. It will detail how it wants to accomplish that in a medium-term fiscal plan expected in August.
“It is indispensable that these countries indicate for the long and medium term predictable, credible fiscal policies, anchored in legislation that will not be challenged, which will bring the deficit down in a way that will reverse the debt trajectory to a downward trend,” she said.