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Rebalancing the Economy in Response to Fiscal Consolidation

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  • Richard Peach

Abstract

According to the Congressional Budget Office (CBO), under current policies the ratio of federal debt held by the public over gross domestic product?the debt-to-GDP ratio?will rise rapidly over the next decade. This unsustainable fiscal position presents the nation with two significant challenges. First, it requires fiscal consolidation that will, at a minimum, cause the ratio to level off in the not-too-distant future. Second, fiscal consolidation has to occur in a way that will keep the U.S. economy operating at as close to full employment as possible?a process known as rebalancing. While these challenges are very daunting, we?ve faced them before, and met them quite successfully in the mid-1980s through the mid-1990s. Using federal budget accounting and national income accounting, this post describes how fiscal consolidation and rebalancing were accomplished in the previous episode. By doing so, we can put our current fiscal position in perspective while shedding light on what needs to happen if we?re to be successful this time.

Suggested Citation

  • Richard Peach, 2012. "Rebalancing the Economy in Response to Fiscal Consolidation," Liberty Street Economics 20120926, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:86830
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    File URL: https://libertystreeteconomics.newyorkfed.org/2012/09/rebalancing-the-economy-in-response-to-fiscal-consolidation.html
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    More about this item

    Keywords

    Fiscal Consolidation Full Employment;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H00 - Public Economics - - General - - - General

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