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IMF Warns Against Austerity In U.S. Federal Budget

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A new IMF report warned about the risks for the U.S. economy of not reaching a budget deal.
A new IMF report warned about the risks for the U.S. economy of not reaching a budget deal.

The U.S. economy will continue to grow at a sluggish rate in the coming year as government spending cuts threaten its recovery, according to a new report from the International Monetary Fund.

The IMF predicts the economy will grow at a "tepid" 2 percent in 2012 and only a little more in 2013. This is not good news for President Barack Obama, whose reelection fortunes largely hinge on continued economic progress. But key trouble spots identified by the report are, to a significant extent, outside the president's control.

In particular, the report points to potential calamity in the European Union and the congressional impasse over the federal budget.

With the ongoing economic trouble in countries like Greece and Spain, the EU is struggling to avoid another significant downturn. "The United States remains vulnerable to contagion from an intensification of the euro area debt crisis," the report warns.

As for the "domestic front," the report says, "failure to reach an agreement on near-term tax and spending policies would trigger a severe fiscal tightening in 2013, threatening the recovery."

Last year, the Budget Control Act, which arose out of the tense negotiations over raising the debt ceiling, directed Congress to reach a deal addressing the nation's fiscal imbalances or else make across-the-board budget cuts. No comprehensive budget deal emerged, and now those deep cuts, known as "sequestration," are scheduled to take effect early next year, which the report cautions will have devastating consequences for the economy. Tax cuts enacted during the Bush administration in 2001 and 2003 are also scheduled to expire in January.

"It is critical to remove the uncertainty created by the 'fiscal cliff' as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery," the report says.

Although the IMF is not considered a left-leaning organization, its prescriptions for the U.S. economy comport with those of progressive economists like Paul Krugman, who have urged more government stimulus spending.

The IMF's warnings come on top of another report from the Federal Reserve Bank of San Francisco, released on Monday, which also warned that reduced government spending would be a drag on the recovery. "Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth," that report warned.

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