## U.S. Fiscal Policy: A Tough Balancing Act _IMF Blog, July 30, 2013_ ## Source details **Canonical URL:** [U.S. Fiscal Policy: A Tough Balancing Act](https://www.imf.org/en/blogs/articles/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act) ## Other formats - [Markdown version](/en/blogs/articles/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act/index.md) - [Structured JSON version](/en/blogs/articles/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act/index.json) - [Bundle manifest](/en/blogs/articles/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act/bundle-manifest.json) ## Bibliographic details - Authors: Deniz Igan - Published: July 30, 2013 --- ### Debt reduction — recent developments and fiscal stance - The federal government budget deficit has fallen sharply from almost 12 percent of GDP in 2009 to less than 7 percent in 2012. - Recent budget reports show that the deficit is shrinking faster than expected only a few months ago, to a projected 4½ percent of GDP for the current fiscal year, which ends September 30. - Health care cost growth has slowed down dramatically since the Great Recession, alleviating pressure on public health care programs at least temporarily. - Despite improvements, if policy choices and timing are not right, deficit reduction may be "too much in the short run—stunting the economic recovery—and not enough in the long run." ### Slow down — short-term risks from abrupt fiscal tightening - Around this time last year there was concern that temporary tax cuts would fully expire and the sequester would kick in on January 1, 2013, creating a "fiscal cliff." - Congress partly averted the fiscal cliff: tax cuts were permanently extended for taxpayers below a certain income threshold, the sequester was delayed temporarily and allowed to take effect on March 1, 2013. - The sequester imposes indiscriminate budget cuts, affecting education, science, and infrastructure, at a time when the recovery is still fragile. - IMF estimates suggest that if the sequester did not happen, real GDP growth in 2013 would have been half a percentage point higher. ### Yet hurry up — the medium- and long-term outlook - The longer-run fiscal outlook is not as intimidating as projected a few years ago. - In 2010, the IMF projected an unsustainable trajectory for public debt—federal government debt ratio could reach levels close to 100 percent of GDP. - Subsequent legislation has improved projections: the federal debt in 2020 is now anticipated to be about 20 percentage points below what it was projected to be back in 2010. - Nevertheless, long-term challenges persist because of population aging, rapid growth in health care costs, and anticipated increases in interest rates. - Spending on Social Security and major health care programs, even considering the recent slowdown, is expected to increase by close to 2 percentage points of GDP over the next decade. - A similar increase is projected for net interest outlays as interest rates gradually normalize. - With no further actions to raise revenues and reduce entitlement spending, the public debt ratio would start rising again from a relatively high starting point. ### What should be done? — priorities for policy - Implement a deficit reduction plan to curb pressure that emerges around mid-decade, when the recovery is complete, interest rates return to historical norms, and demographic pressures kick in. - The plan should: - Protect the fragile recovery―the bulk of deficit reduction should begin when the economy is firmly back on its feet and before the public debt ratio starts rising again. - Entail lower growth in entitlement spending and higher revenues―savings from entitlement reform accrue at a very gradual pace, so early legislative action is crucial to be able to reap the benefits later. Early action would also help contain the rise in long-term interest rates, thus promoting growth, and reduce the risk of turmoil in the Treasury market. - Replace the sequester with better-targeted cuts and new revenues―these automatic cuts fail to address the real problem (spending on entitlement programs), hurt growth in the short term, and could damage medium-term potential growth if the reductions in education, science, and infrastructure spending are maintained. ### Easier said than done — political constraints and common ground - Considerable disagreements exist across the political spectrum on what a deficit reduction plan should look like—hence, the continuing lack of a comprehensive plan. - Negotiations so far have shown that there is common ground that can form the basis for a bipartisan blueprint. - The overarching message: explore options to replace the sequester and fine-tune the pace of fiscal adjustment so that no harm is done to economic growth, and enact laws today that will address the medium-term threats to fiscal sustainability. *Source: U.S. Fiscal Policy: A Tough Balancing Act, Deniz Igan, July 30, 2013* --- ## Content in this bundle - **Country Report** - [Country Report (Markdown version)](/external/pubs/ft/scr/2013/cr13236.pdf.md){rel="alternate" type="text/markdown"} - [Country Report (PDF)](/external/pubs/ft/scr/2013/cr13236.pdf){rel="external" type="application/pdf"} --- ## References - [https://www.imf.org/wp-content/uploads/2013/07/u-s-fiscal-outlook-chart.jpg](https://www.imf.org/wp-content/uploads/2013/07/u-s-fiscal-outlook-chart.jpg) _Source: https://www.imf.org/en/blogs/articles/2013/07/30/u-s-fiscal-policy-a-tough-balancing-act_