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IMF's Lagarde criticises US spending cuts

Published:Wednesday | May 8, 2013 | 12:00 AM
IMF managing director Christine Lagarde

International Monetary Fund (IMF) head Christine Lagarde criticised the US government's budget policies as too tight on Tuesday, in an appearance in Amsterdam that was interrupted by student protestors.

Lagarde said the US government's debt reduction plans are too abrupt, including the $85 billion in federal budget cuts known as the sequester. She said that if current policies are maintained this year "the US economy would be contracting by over one and a half per cent".

The IMF's most recent forecast in April said the US economy would grow two per cent this year - 1.75 percentage points lower than it otherwise would have been due to the tax hikes and spending cuts. The sequester alone would reduce growth by 0.5 percentage points in all if maintained to the end of 2013.

Going forward

The US "should consolidate less in the short term, but give ... economic actors the certainty that there will be fiscal consolidation going forward," she said.

Lagarde had just begun speaking to students at the University of Amsterdam when the protestors began an organised, chanting disruption. One would call out "Mic check!" and dozens more would yell back "Madame Lagarde!"

Then individual students mocked her as supposedly believing that "technocracy is better than democracy" and satirised her as having said that Greeks should "help paying all their tax".

Security guards dragged students away until there were none left shouting, and eventually the interview resumed.

Lagarde defended reforms the IMF had recommended be carried out in Greece, but admitted they had caused a greater economic decline than expected.

"What we underestimated is the consequences. That's clear," she said.

The 17-country eurozone is in recession, and Lagarde and an increasing number of economists now criticize a German-led drive for all members to get their budget deficits under three per cent as soon as possible.

Lagarde said that the IMF doesn't believe "that austerity and growth are mutually exclusive," but she said the fund doesn't believe austerity policies alone can lead to growth.


She praised a recent European Commission decision to allow France and the Netherlands more time to get their budget deficits down.

"The fact that they are allowing more time is a good move," she said.

One student attempted to pose a question out of turn later in her talk and guards began dragging him away. When he began questioning why Lagarde was only willing to field pre-approved questions, she intervened and asked that he be allowed to pose his question.

The guards allowed him to return, and he asked whether IMF aid doesn't usually end up disproportionately benefitting the rich.

She said economic reforms work better in countries with less income inequality, and the IMF tries to include that in its advice - which is not always heeded by governments.

"We're not imposing a particular system," she said. "We're trying to be rational about what can actually balance a country."