04/16/2013 11:40 am ET Updated Jun 16, 2013

IMF Admits 'Absurd' U.S. Spending Cuts Improved Deficit Outlook


WASHINGTON, April 16 (Reuters) - The International Monetary Fund acknowledged on Tuesday that across-the-board U.S. government spending cuts this year which it viewed as "absurd" also delivered a distinct improvement in the outlook for the country's deficit and debt.

Political gridlock generated by Washington budget battles between Republicans and President Barack Obama's Democrats gave rise to the automatic cuts, known as sequesters, that began to bite on March 1 at an initial level of $85 billion.

"For the U.S. there is something mildly ironic about the effect of polarization, which is it gave us something that neither party wanted, which was the sequester," said IMF chief economist Olivier Blanchard.

He said U.S. fiscal tightening probably cost between 1.5 and 2.0 percent in terms of national growth in 2013, but had also had a positive impact on the deficit and debt.

"The sequester is absurd. It is the wrong way of doing things. But it does something - namely, it reduces the deficit, and has made the worries about debt sustainability in the U.S. decrease," Blanchard told a press conference on the launch of the IMF's latest semi-annual World Economic Outlook.

The cuts threaten to cause temporary layoffs for hundreds of thousands of U.S. government workers and defense contractors, and lawmakers on Capitol Hill are debating how to achieve the savings in a manner that does less harm to the economy.

The IMF's latest Fiscal Monitor estimates that the U.S. deficit will decline by around 2.0 percent of GDP (gross domestic product) this year to 6.5 percent of GDP.