By Anna Yukhananov
WASHINGTON, June 14 The International Monetary
Fund urged the United States on Friday to repeal sweeping
government spending cuts and recommended that the Federal
Reserve continue a bond-buying program through at least the end
of the year.
In its annual check of the health of the U.S. economy, the
IMF forecast economic growth would be a sluggish 1.9 percent
this year. The IMF estimates growth would be as much as 1.75
percentage points higher if not for a rush to cut the
government's budget deficit.
The IMF cut its outlook for economic growth in 2014 to 2.7
percent, below its 3 percent forecast published in April. The
Fund said in April it still assumed the deep government spending
cuts would be repealed, but it had now dropped that assumption.
Washington slashed the federal budget in March, adding to
the drag on the economy created by tax increases enacted in
The IMF said the United States should reverse the spending
cuts and instead adopt a plan to slow the growth in spending on
government-funded health care and pensions, known as
"entitlements." The Fund would also like the United States to
collect more in taxes.
"The deficit reduction in 2013 has been excessively rapid
and ill-designed," the IMF said. "These cuts should be replaced
with a back-loaded mix of entitlement savings and new revenues."
The IMF warned cuts to education, science and infrastructure
spending could reduce potential growth.
While the Fund said total debt across all levels of
government would likely decline after 2015, public finances are
nevertheless on an unsustainable path due to an aging population
and higher spending on health care.
"Now our advice is not just to slow down (budget cuts)," IMF
Managing Director Christine Lagarde said at a news conference.
"Our advice is also to hurry up: hurry up with putting in place
a medium-term road map to restore long-run fiscal
She said effects of higher spending on health care and other
programs build up over time, so it was important to act quickly
to address them.
KEEP EASING FOR NOW
The Fund recommended that the U.S. Federal Reserve keep up
its massive asset purchases at least through the end of the year
to support the U.S. recovery, but should also prepare for a
pull-back in the future.
The Fed is currently buying $85 billion per month of
Treasuries and mortgage-backed securities in an effort to lower
borrowing costs and spur employment growth. Lagarde said the IMF
has assumed that the Fed would begin trimming bond purchases
Speculation over when the Fed might start to pare back its
bond buying has roiled financial markets recently. Fed Chairman
Ben Bernanke stoked market speculation last month when he said a
decision to pare the Fed's current pace of asset purchases might
happen at one of the Fed's "next few meetings" if the economy
looked set to maintain momentum.
Recent outflows from bond funds and the rise in volatility
offer a worrying glimpse of how markets are likely to behave as
the Fed works to scale back its enormous monetary stimulus.
The IMF said unwinding the easy-money policies would likely
present challenges, and it was key for the Fed to communicate
effectively with markets.
It also said the long period of low interest rates could
have unintended consequences in the future, sowing the seeds of
future financial vulnerabilities.