Abstract

The United States has experienced long periods of external and fiscal imbalances. Fiscal deficits were substantial in the mid-2000s and widened significantly during the financial crisis. External deficits have reflected weak fiscal balances and other factors contributing to low national saving, including external factors that underlie strong foreign demand for U.S. assets. Going forward, large budget deficits and moderate current account deficits are projected to persist, exacerbating U.S. and global vulnerabilities. Policies to restore soundness to public finances include limiting the growth of expenditures (crucially, through entitlement reform) and raising revenues (including through tax reform). Robust financial regulation is equally important to safeguard stability and to prevent excessive credit and leverage that led to the buildup of systemic risk and unsustainably low household saving in the past. Achieving strong, sustainable, and balanced growth would require rebalancing away from a heavy reliance on private consumption (before the crisis), followed by fiscal support (during the crisis), toward an increasing contribution from external demand.