by Thomas Grennes
February 11, 2013
The quality of fiscal institutions and fiscal policy in the United States has declined in the last decade. The government debt ratio is now extraordinarily high relative to its historical mean, and it has risen to a point where it is no longer sustainable. By exceeding estimated debt/growth thresholds, the debt ratio threatens to reduce the rate of economic growth. Failure to address the long-run debt issue has led to a diminution of credibility that fiscal institutions had built up over a period of more than 200 years. Procrastination about crucial spending, taxation, and debt issues has also increased uncertainty faced by private investors. The European Union also faces a fundamental fiscal problem, but its origin is different. The current European fiscal problem is related to violating more recent rules. Fundamental reform of fiscal relationships is essential but failure to enforce old rules will make it difficult to achieve credibility for new ones.