IMF's economist: budget cuts may hurt growth less now

Thu Jan 3, 2013 6:47pm EST
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By Anna Yukhananov

WASHINGTON (Reuters) - Belt-tightening in advanced economies may not be as harmful to growth now as it was during the height of the financial crisis, but governments should still be careful about drastic cuts, an International Monetary Fund research paper found on Thursday.

The IMF came under heavy criticism in October when it conceded that austerity programs it recommended during the global economic crisis were more costly than expected, causing economic damage that was as much as triple the amount forecast.

In a follow-up paper by the IMF's chief economist, Olivier Blanchard, and his colleague, Daniel Leigh, stood by their initial conclusions but said the harshest impact of those programs may be fading as economies start to recover.

The paper in October fueled critics of steep budget cuts in debt-burdened European economies, and prompted the IMF to soften its own recommendations for austerity in the euro zone crisis.

It said that now it believed forcing Greece and other debt-burdened countries to reduce their deficits too quickly would be counterproductive.

"For example, in Portugal, we have relaxed fiscal deficit targets," said Blanchard, the IMF chief economist.

But Germany said at the time that back-tracking on debt-reduction goals would only hurt market confidence.

Some economists also questioned the methodology the IMF had used in its initial research, saying the findings may have been exaggerated, or only applied to certain countries or times.   Continued...

International Monetary Fund's Economic Counsellor and Director of the Research Department, Olivier Blanchard speaks at a joint news conference on the World Economic Outlook January 24, 2012 at the IMF Headquarters in Washington, DC. REUTERS/Stephen Jaffe/IMF/Handout