IMF Emphasizes Need Smarter Deficit Reduction Strategy

After finishing its preliminary annual review of the U.S., the International Monetary Fund (IMF) concluded the U.S. could spur additional economic growth by adopting a balanced and more gradual pace of deficit reduction, while not abandoning fiscal sustainability. Possibly as a result of the automatic spending cuts enacted by the sequester, the IMF has lowered its growth forecast for the U.S. economy in 2013 to 1.9 percent from 2.2 in 2012. Rather than continuing the unnecessarily harsh short-term cuts in the sequester, lawmakers should replace it with a more back-loaded deficit reduction plan that gets more savings in the long term and (unlike the sequester) protects important investments in things like infrastructure and education.

IMF director Christine Lagarde puts their recommendations as follows:

There are signs that the U.S. recovery is gaining ground and becoming more durable. However, it has a way to go before returning to full strength. 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.

Within its assessment, the IMF highlights a series of fiscal policy measures to help promote economic growth in the short term, but more importantly, they also address the medium and long-term fiscal sustainability challenges the U.S. continues to face with demographic and health care pressures and increased interest payments from growing debt. Its recommendations include:

  • Repealing the sequester and adopting a more balanced and gradual pace of fiscal consolidation
  • Raising the debt ceiling to avoid a severe shock to the United States and the global economy
  • Adopting a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability

As the IMF notes, the sequester is currently harming the economy's ability to recover. Thus repealing the sequester and replacing it more substantial long-term deficit reduction will give the economy more breathing room in the short term while shoring up the long term. A medium- to long-term-oriented deficit reduction plan would allow us to simultaneously support the current economic recover -- which will be necessary to help put our debt on a sustainable path -- while addressing many of the future fiscal issues the U.S. will be dealt within the next decade.