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The US fiscal mess: Some unpleasant fiscal simulations
Based on recent projections, the US federal debt is expected to grow to historic highs over the next decade. This column uses the FRB-US model to simulate fiscal scenarios for the US. Across all fiscal consolidations considered, the debt/GDP ratio and interest bill increase at least until 2026-2027. Growth is not a way out: without corrective measures, nothing short of unrealistic growth of 4% or more would work, and recession risks remain. A decade-long plan ending in 2034 could work but would require (bipartisan consensus on) ambitious fiscal reforms over the period. Still, waiting is costly and risky.
Targeting a stable deficit/GDP ratio in the next few years requires a significant increase in the average tax rate on personal income, possibly too large to be politically acceptable. We substantiate these points with an analysis of fiscal consolidation scenarios that we have constructed using FRB-US, envisioning spending cuts, tax hikes, and a combination of the two, as well as varying the US growth rates, over different time horizons. In our best scenario analysis, stabilising the fiscal outlook will take years to accomplish, but also require significant action already in the short run, operating on both spending and taxation.
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