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IMF Says Automatic Austerity Is Wrecking U.S. Economic Growth

By Alan Pyke on June 14, 2013 at 4:15 pm

"IMF Says Automatic Austerity Is Wrecking U.S. Economic Growth"

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One week after conceding that it underestimated the negative impact of austerity measures in Greece, the International Monetary Fund (IMF) is condemning American lawmakers’ rapid turn to spending cuts. The fund’s analysts say that “an excessively rapid pace of fiscal deficit reduction” will cost the country between 1.25 and 1.75 percent points of GDP growth this year, and it now projects just 1.9 percent total growth for 2013.

The IMF notes that the wound is self-inflicted and offers three specific suggestions for salving it:

Repeal the sequester and adopt a more balanced and gradual pace of fiscal consolidation. […]
Raise the debt ceiling to avoid a severe shock to the United States and the global economy.
• Adopt a comprehensive and back-loaded set of measures to restore long-run fiscal sustainability. […] New revenues could be raised through a reduction in tax exemptions and deductions, as well as though the introduction of a carbon tax and a value added tax. Spending measures would need to curb the growth in public health care and pension outlays.

The report also notes that sequestration’s damage will carry on past the near future and warns that its “arbitrary reductions in education, science, and infrastructure spending could also reduce medium-term potential growth.” Without sequestration, economic growth could have surpassed 3 percent for the year. But the fund no longer expects the economy to reach that level of growth until 2015. That means austerity is keeping growth below the level needed to begin closing the nearly trillion-dollar “output gap” –- the shortfall between potential growth and actual growth.

In other words, the immediate deficit reduction fiscal conservatives in the U.S. celebrate as a good start is in fact preventing the ongoing economic expansion from leading to an actual economic recovery. After over three years of a slow, steady expansion in jobs and GDP growth, the economy still isn’t hitting the escape velocity required to get to where it ought to be. There is already much evidence that the growth promised by pro-austerity politicians is not materializing, and now the IMF’s number crunchers are confirming that U.S. fiscal policy is harmful.

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