IMF warns spending cuts will stall global recovery
WASHINGTON: IMF chief Christine Lagarde on Monday warned governments not to slash spending to avoid sparking a new recession and stalling the feeble economic recovery from the 2008 crisis.
“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects,” Lagarde said in an opinion piece to be published in Tuesday’s Financial Times newspaper.
Lagarde’s comments came as pressure was rising – including from the International Monetary Fund itself – on advanced countries like the United States and Europe’s largest economies to trim their debt burdens, and also as worries rose over slowing growth around the world.
In the United States especially, domestic politics and the recent sovereign credit rating downgrade by Standard and Poor’s are pushing the government into drastic spending cuts just as the economy appears to be stalling.
In France, where there are also worries of an S&P downgrade, the government is preparing spending cuts as well.
But the IMF has encouraged the highly indebted, advanced economies to take a long-term view of deficit reduction and to implement both spending cuts and tax increases.
On August 2, after US politicians struck a last-minute deal to raise the country’s statutory debt ceiling to avoid a default, Lagarde warned that the country’s planned spending cuts should be “appropriately phased” to avoid undermining economic growth.
Policy-makers need a plan with “clear medium-term debt and deficit objectives,” she said, adding that new revenues had to be found in parallel with long-term cost reduction.
On Monday, Moody’s Analytics sharply cut its projections for US growth in the second half to 2.0 per cent or less, from a forecast of 3.5 per cent just one month ago.
Moody’s also said there was a one-in-three chance the country could fall back into recession.