Fiscal Roadmap: "Deficit Reduction: Lessons From Around the World"

The U.S. economy appears to be gradually recovering, and positive growth is expected now and for the rest of the year. Looking ahead, however, U.S. policymakers will need to take steps to put our fiscal house in order once the recovery is on firmer footing. In the absence of policy change, U.S. debt is headed sharply upward coming out of the current economic and financial crisis – and this is even before the Baby Boom retirement tsunami hits the budget.

For all Americans, this means that a growing portion of the budget will be devoted to interest payments on debt service – rather than on new, important pro-growth priorities related to environmental and infrastructure initiatives, for example. Our standards of living and well-being will undoubtedly suffer over time. This is no way for a great nation to conduct its business.

In a new paper (“Deficit Reduction: Lessons From Around the World”), the Fiscal Roadmap Project (FRP) of the Committee for a Responsible Federal Budget (CRFB) looks at how other countries turned around their deteriorating fiscal positions – often during tough economic times not unlike the present. To provide lessons for U.S. policy going forward, the paper examines deficit reduction efforts in many other countries over the past 30 years.

Countries with fiscal problems have usually adopted deficit reduction programs (also known as “fiscal consolidation” programs). Fiscal consolidation has often been undertaken as part of an announced medium-term framework, to provide certainty for households, businesses and creditors. Past experiences suggest that announcement (including an early announcement) of a credible deficit reduction plan can have positive effects on consumers, businesses, and financial markets. The most successful plans have involved large adjustment over many years, but the phase-in can be gradual. The composition of the plans has varied. Countries were often able to launch strong recovery programs after undertaking - or even within the framework of - a fiscal consolidation program.

An important lesson is also that it is preferable to make fiscal adjustments on your own terms before they are forced upon you by creditors.

For details, see the FRP/CRFB paper “Deficit Reduction: Lessons From Around the World”.