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June 14th, 2013 
Peter Nolan
THE IMF has cut its US growth forecast for 2014 to 2.7 per cent, saying the economy is being held back by “excessively rapid and ill-designed” government spending cuts.
The severe sequester cuts, aimed at closing the US deficit, are already taking up to 1.75 percentage points from this year’s growth potential.
And even though growth will pick up pace in 2014, it will still be less than the 3.0 per cent the IMF previously forecast, due to the impact of the sequester, which requires $109 billion to be sliced from spending in the coming fiscal year.
In its annual report on the United States, the International Monetary Fund called on Congress to repeal the sequester, saying that stronger growth in the short term is important both for the US and global economies.
“The automatic spending cuts not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth,” the IMF said.
The sequester cuts for this year have had one beneficial outcome, cutting the fiscal deficit by a huge 2.5 per cent, the Fund said on Friday.
But that is likely too much in a short period.
“The deficit reduction in 2013 has been excessively rapid and ill-designed,” it said.
“A slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further,” the Fund said.
Despite encouraging a looser fiscal stance now, and despite the narrowing of the fiscal gap, the IMF still warned that Washington needs to do more to address its longer term fiscal imbalances.
With the economy picking up, gross US government debt was projected to peak at 110 per cent of gross domestic product in 2015 and start to decline.
“But the longer-term debt profile remains unsustainable,” the report said.
“Despite the slowdown in growth rates over the past few years, spending on major health-care programs and Social Security, absent additional reforms, is expected to increase by two percentage points over the next decade.”
That will cause the deficit to begin widening and start pushing the debt ratio back up.
It suggested fundamental tax reforms as part of actions to confront the longer term fiscal shortfall, including eliminating many exemptions and loopholes, and introducing a value-added tax and a carbon tax.
The Fund held its growth forecast for this year at 1.9 per cent, saying the pickup will only really start toward the end of the year.
But it said the ongoing, if slow, recovery was being driven by the recovery in the housing market and improved corporate and household balance sheets.
It credited the Federal Reserve’s aggressive quantitative easing – its $US85 billion ($A88.53 billion) a month bond purchases, to hold down interest rates – with keeping the economy on a sure footing as the government slashes spending.
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