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Briefing

United States: Fiscal Policy

Critical Issues

Should the Bush Tax Cuts Be Extended or Allowed to Expire?

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Can the U.S. Administration Tackle the Fiscal Deficit Amid Political Gridlock?

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Will Surging U.S. Debt Weaken Future Economic Growth?

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Is the U.S. Fiscal Deficit Reaching Unsustainable Levels?

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Will U.S. Sovereign Ratings Come Under Pressure?

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Will the U.S. Administration's Tax Reform Proposals Ease or Exacerbate the Fiscal Burden?

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How Would Closing Loopholes for MNCs and Offshore Tax Havens Impact Federal Receipts, Growth, Employment?

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Background:

The U.S. ran large fiscal deficits in the late 1980s and early 1990s. The deficit shrank significantly during the late 1990s and moved to a surplus during 1998-2001. Notwithstanding rising entitlement spending and the 2001-2003 tax cuts, the fiscal deficit remained low during 2002-2007 as strong economic growth boosted revenues from the corporate and financial sectors. While cyclical factors such as plunging revenues due to the recession and high stimulus spending have raised the U.S. fiscal deficit during 2009-10, the deficit also suffers from structural problems—loose fiscal policy during the boom years, delayed tax and entitlement reforms and lack of political will to tackle the deficit. With an aging population and rising debt burden, an increasing share of government expenditure will be allocated to interest payments and entitlements in the coming years, reducing government's productive investment and crowding out private investment. After approving the US$787 billion fiscal stimulus package in February 2009, Washington will continue to implement smaller stimulus measures to support private deamnd and employment in the near term. But once the recovery sets in, the government needs to run a primary surplus by a combination of higher taxes and spending cuts, which might lead to a weaker economic recovery by itself. Not tightening the fiscal policy will raise long-term yields and pose a risk to U.S. debt ratings.

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Associated Readings

Blogs Maverecon Willem Buiter Jun 12, 2009 The Fiscal Black Hole in the US Analysis Economist Jun 10, 2009 America's debt is Barack Obama's biggest weakness Analysis Federal Reserve Ben S. Bernanke Jun 03, 2009 Current economic and financial conditions and the federal budget; Before the Committee on the Budget, U.S. House of Representatives Analysis Nouriel Roubini's Global EconoMonitor May 28, 2009 When the public debt rubber meets the investors’ anxiety asphalt Opinions Financial Times John Taylor May 26, 2009 Exploding debt threatens America Analysis U.S. Treasury May 2009 U.S. Department of the Treasury FY 2010 Budget in Brief Analysis Congressional Budget Office March 2009 A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook Research The Brookings Institution Alan J. Auerbach and William G. Gale Feb 19, 2009 The Economic Crisis and the Fiscal Crisis: 2009 and Beyond