Putting US Fiscal Policy on a Sustainable Path

Even allowing for uncertainty about the future economy, current US fiscal policies are almost certainly unsustainable. Therefore, policymakers must decide when and in what ways to raise taxes and reduce spending to put debt on a lower trajectory. Acting sooner rather than later would increase national savings, broaden the policy options, reduce the chance of a fiscal crisis, and provide fiscal space for responding to adverse developments. The probability of a near-term fiscal crisis is difficult to assess: Yields on Treasury debt are within their ranges of the past few decades, which suggests that investors are not that worried about the budget outlook—but debt and deficits are at exceptionally high levels, and experience shows that investors' confidence in a government's fiscal management can deteriorate quickly.