IMF Warns U.S. Austerity Will Slow Growth

There was a period when the U.S. looked like it might avoid the mistakes of some of its European counterparts, who rushed to austerity and have found themselves saddled with stagnant growth. But the U.S. has gotten into the austerity game, most recently with the implementation of sequestration’s across-the-board spending cuts.

And just like its austere European neighbors, the U.K. in particular, it’s now getting a warning from the International Monetary Fund (IMF). In its latest report, the biannual World Economic Outlook, the New York Times reports that the organization had some stern words for those who think cutting government spending in the middle of a sluggish recovery is a good idea:

The fund lowered its estimate of United States growth this year to 1.9 percent, down 0.2 percentage point from its January forecast. While Washington had avoided falling over the “fiscal cliff,” the I.M.F. said that the United States had proved too aggressive in carrying out budget cuts, given its still-sluggish rates of growth and high unemployment levels. It said it anticipated that the across-the-board $85 billion in budget cuts known as sequestration would push down growth levels this year and beyond.

“The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate,” Olivier Blanchard, the fund’s chief economist, said in the report. “But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

The fund also lowered its projection of global growth to about 3.3 percent this year, a 0.2 percentage point reduction. And it didn’t just dole out harsh words for the U.S.: It lowered its forecasts for U.K. growth by 0.3 percentage points for this year and next, citing slashed spending.

Sequestration is already hurting the U.S. economy, but it’s not the only austerity measure that’s causing pain. Government spending overall has been lower during Obama’s administration than any point since the Eisenhower era. This is at a time of miserably high unemployment and incredibly low interest rates on U.S. borrowing. The U.S. could instead be spending money to rebuild crumbling infrastructure and put people back to work.