## Between a Rock and a Hard Place: U.S. Fiscal Policy

_IMF Blog, July 25, 2011_

## Source details

**Canonical URL:** [Between a Rock and a Hard Place: U.S. Fiscal Policy](https://www.imf.org/en/blogs/articles/2011/07/25/between-a-rock-and-a-hard-place-u-s-fiscal-policy)

## Other formats

- [Markdown version](/en/blogs/articles/2011/07/25/between-a-rock-and-a-hard-place-u-s-fiscal-policy/index.md)
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## Bibliographic details
- Published: July 25, 2011

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### Overview
- The United States faces two pressing fiscal challenges: raise the debt ceiling, and begin reducing deficits and debt.
- The situation is characterized as “between a rock and a hard place,” with crucial questions on how much savings to find, in what form, and when to implement them.
- The fiscal problem was center stage in the IMF’s 2011 annual assessment—or Article IV consultation—of the United States’ economy.

### Fiscal position and unsustainability
- By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007.
- The federal fiscal deficit will be 9.3 percent of GDP this year.
- If left on automatic pilot, debt would continue to increase faster than the economy until financial markets react; credit rating agencies have issued warnings.
- Active policies to lower the fiscal deficit of the order of 5 percent of GDP in the next several years would put debt on a sustainable path based on official U.S. projections.
- Under more conservative IMF projections, the United States needs to find savings of approximately $6 trillion.
- A $4 trillion savings over 10 years, as publicly discussed by policymakers during debt ceiling negotiations, is described as a very good first step.

### Unemployment and short-term risks
- Too much fiscal retrenchment in the short run could unduly weaken an economy recovering very gradually and lately losing momentum.
- In the first half of 2011, output appears to have grown at an average annual rate of less than 2 percent.
- That pace is insufficient to significantly reduce very high unemployment.
- Persistently weak labor market conditions can damage long-run prospects by causing long-term unemployed workers to lose skills and find it increasingly difficult to find jobs.

### Policy recommendations and sequencing
- Top priority: reach political agreement on a comprehensive adjustment plan that begins the consolidation process in FY 2012.
- The plan should be:
  - Appropriate in size and spread over several years to avoid overly tight policies in 2012-13.
  - Balanced to include cuts in discretionary spending, higher revenues (for example by closing tax loopholes), and entitlement reforms.
  - Entitlement reforms should focus on containing the rate of growth of entitlements—namely, social security and health care—and can kick in later, but must be agreed and legislated now.
- Curbing non-defense discretionary spending alone is not sufficient because this type of spending is not large enough to achieve the required deficit reduction.
- Analogy: start now but avoid “crash dieting” — gradual and enduring adjustment is preferable, and the strategy should rely on more than one lever.

### Mechanics and risks affecting required adjustment
- Putting public debt on a sustainable path—stabilizing its ratio to GDP by mid-decade and then lowering it gradually—depends on:
  - The pace at which the economy grows: stronger growth increases revenues and reduces the debt-to-GDP ratio.
  - Interest rates in the next several years: higher interest rates increase the adjustment required because the interest bill consumes more revenue.
- Higher debt tends to lift interest rates, which raises the interest bill and complicates consolidation efforts.

*Source: Between a Rock and a Hard Place: U.S. Fiscal Policy (IMF blog, July 25, 2011).*

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## References

- [https://www.imf.org/wp-content/uploads/2011/07/rodrigo-valdes.jpg](https://www.imf.org/wp-content/uploads/2011/07/rodrigo-valdes.jpg)
- [IMF’s 2011 annual assessment](http://www.imf.org/external/np/sec/pn/2011/pn1197.htm)

_Source: https://www.imf.org/en/blogs/articles/2011/07/25/between-a-rock-and-a-hard-place-u-s-fiscal-policy_