It is not just up to Washington to correct global imbalances
16 Jan '06
10 min read
The U.S. economy has for some time been one of the main engines driving global growth. But as the projected net external liabilities of the U.S. continue to increase, so the vulnerabilities of the U.S. economy continue to grow. Therefore, it is particularly important, and increasingly urgent, that the U.S. tackle its current account deficit by increasing domestic saving to avoid the burden of adjustment falling on investment and growth. This requires bold action to reduce the fiscal deficit.
The U.S. administration recognizes the need for deficit reduction, but a major element in its plan is unprecedented cuts in spending. These would have been difficult to achieve even before the devastation wrought by Hurricane Katrina. Uncertainties about the costs of operations in Iraq and Afghanistan, the reconstruction of the Gulf Coast, and the outcome of Congressional debates on how to control entitlement spending, cast further doubt on whether the goals of the deficit reduction plan can be achieved.
In our view, actions on the revenue side, preferably through reforms to broaden and simplify the tax base, will also be needed. Measures to raise revenue are not very popular in Washington, but neither are higher interest rates, more expensive goods, or financial market turbulence, which are among the possible outcomes in the United States of a disorderly adjustment of global imbalances. And serious consideration of revenue measures could also be coupled with a long-overdue reform of the U.S. tax system.
marketing@alchempro.com
