Paul Lachine

Four Steps to US Fiscal Health

The US has a significant budget deficit, likely to be $1.3 trillion (10% of GDP) this year, and the long-term forecasts are worrying. While America can finance these deficits in the short term, if there is no serious effort at fiscal consolidation, serious trouble lies ahead, both for the US and for the world economy.

WASHINGTON, DC – The United States has a significant budget deficit, likely to be $1.3 trillion (10% of GDP) this year, and the long-term forecasts are worrying. According to the Congressional Budget Office (CBO, the leading nonpartisan experts), Social Security, together with Medicare, Medicaid, and other health-care programs, will grow to consume almost all tax revenues by 2035.

The US can finance these deficits in the short term – in fact, interest rates on US Treasuries have recently fallen to record low levels. But if there is no serious effort at fiscal consolidation, serious trouble lies ahead, both for the US and for the world economy. Thus, the US urgently needs to begin making four serious changes.

The first is comprehensive tax reform aimed at aligning tax policy with desirable economic incentives. In particular, the US should consider introducing a value-added tax (VAT), widely used in other industrialized countries. By levying a tax on consumption at each stage of the production chain, America could reduce the overconsumption that helped feed the recent credit bubble, encouraging savings and investment instead. To be sure, a simple VAT is regressive, though it can be made progressive by combining it with a partial rebate or by exempting necessities.

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