Fund credits booming energy market with boosting US but warns Congress against spending less on infrastructure and education

This article is more than 7 years old

This article is more than 7 years old

The International Monetary Fund said on Friday that an "excessively rapid and ill-designed" deficit reduction plan had hampered the "tepid" recovery in the US economy.

In its annual report on the US economy, the IMF said growth this year would have been as much as 1.75% higher than the sluggish 1.9% forecast had spending cuts and tax increases been introduced more slowly. It forecast 2.7% growth for 2014.

"The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said. "These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the administration's budget proposal."

The organisation warned that cuts to education, science and infrastructure spending could reduce US potential growth in the medium-term.

Christine Lagarde, the IMF's managing director, said: "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."

The IMF predicted that the jobs market would start to gain momentum later this year and said the housing market was recovering more quickly than expected. It also said the boom in the US energy market and in business investments should also boost the economy.

The IMF warned against an early ending to the massive economic stimulus programme being undertaken by the Federal Reserve. In a scheme known as quantitative easing (QE) the Fed is buying $85bn of treasuries and mortgage-backed securities every month in an effort to hold interest rates at record lows and spur employment growth.

But the fund warned of the downside of continued QE, saying: "A long period of exceptionally low interest rates may entail potential unintended consequences for domestic financial stability and has complicated the macro-policy environment in some emerging markets."

The IMF said Congress needed to repealing the sequester cost cuts and adopt "a more balanced and gradual pace of fiscal consolidation in the short term".

"The automatic spending cuts ('sequester') not only exert a heavy toll on growth in the short term but the indiscriminate reductions in education, science and infrastructure spending could also reduce medium-term potential growth,'' said the IMF.