It is not just up to Washington to correct global imbalances
16 Jan '06
10 min read
U.S. policy makers should, therefore, give careful consideration to some of the measures suggested by the President's Advisory Panel on Federal Tax Reform, which issued its report in early November. Although the report proposes packages of measures that are revenue neutral, it points to a number of measures that could raise the tax yield and hence assist deficit reduction. Moreover, the report contains useful suggestions on how to streamline and simplify the current tax code, and suggests further shifting the tax burden from saving toward consumption, which could improve the efficiency of the tax system and help boost private savings.
If the U.S. is prepared to undertake ambitious fiscal adjustment, and also to tackle the long-term financial health of entitlement programs, its position would be much stronger. Tax reform should be debated in a manner that helps support these objectives. A balanced budget (excluding the surplus of the Social Security trust fund) over the medium term, coupled with reforms to place the Social Security and Medicare systems on a sound financial footing, would leave the U.S. fiscal system well placed to cope with the pressures of an aging population. And more immediately, it would raise national saving and help reduce global imbalances.
While Europe so far has not been at the center of the problem of widening external imbalances, it should be part of the solution—for its own sake, as well as for the health of the global economy. The fact that the euro area's current account balance has been small and stable while imbalances have grown elsewhere is no assurance that it can escape the fallout from a disorderly adjustment—especially given the major international role of the euro. Moreover, whether adjustment of the U.S. current account deficit is orderly, occurring through a gradual increase in its public or private savings, or disorderly, occurring through an abrupt exchange rate depreciation and a rise in interest rates that would force a drop in investment and growth, one outcome is likely to be lower growth of exports from other countries to the U.S. This would hurt growth in Europe, which is the last thing Europe needs.
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