Issue The US fiscal tightrope: too little tightening risks crisis, too much risks stagnation

Summary

MGI describes US fiscal policy as a tightrope and names it, alongside corporate earnings, as a swing factor for the US economy. With government debt at about 120 percent of GDP and interest rates higher, more public spending must go to servicing debt, and bond investors could push market rates up, which in turn raises business costs of capital. If fiscal policy tightens too little, a public debt crisis or sustained inflation becomes more likely, and a central bank could then face a choice between financial stability and its inflation target. If it tightens too much, secular stagnation becomes a possible outcome. Balancing the budget would require extra fiscal saving of about three percentage points of GDP, roughly the size of recent primary deficits.