$3 trillion in US deficit reduction? OK, but how you do it matters.
$3 trillion is the cost of Obama's plan that would help put America on sounder footing, many finance experts say. But such fiscal adjustments can be tricky for the economy, IMF report warns.
President Obama tried to "go big" in proposing deficit reduction worth roughly $3 trillion over the next decade – more than he needed in order to cover the cost of his jobs plan and also meet a congressional target set in August.Skip to next paragraph
Is that a good idea for the economy?
Many finance experts support the "go big" notion, although they may differ on the details. But they add an important caveat: At a time of tepid global growth, questions like "when" and "how" can be as important as how big the deficit cuts are.
The latest reminder of this point comes from the International Monetary Fund, which warned in a Tuesday report that nations including the US face a delicate balancing act when it comes to fixing their government finances.
"Fiscal consolidation cannot be too fast or it will kill growth. It cannot be too slow or it will kill credibility," Olivier Blanchard, the IMF's economic counsellor said in the group's latest economic forecast. "The speed must depend on individual country circumstances, but the key continues to be credible medium-term consolidation."
The virtue of an Obama-size fiscal target is that it would reassure investors and other players (like the businesses and consumers who fuel economic growth and pay taxes) that the nation is getting its house in order after some years of record deficits.
The Obama administration estimates that its proposal would bring the federal deficit down to 2.3 percent of US gross domestic product in 2021. "By comparison, if we did nothing, the deficit would be 5.5 percent of GDP in 2021," the White House says. The ratio of national debt to GDP would stop rising.
Republicans have offered their own plans – emphasizing spending cuts and avoiding tax hikes – to get to a similar fiscal position.
The task ahead is for the two sides to try for a deal, whether it's big (such as in the $3 trillion range) or smaller.
The recently passed Budget Control Act puts the onus on a bipartisan supercommittee of 12 lawmakers from the House and Senate. If they don't reach a deal that can be approved by Congress and signed by Obama, then an automatic deficit-reduction plan – $1.2 trillion in spending cuts – will take effect.
But a risk in pursuing deficit cuts is that it might be the opposite of a "fiscal stimulus" for the economy – hurting growth in the near term. Not all forecasters take that view, but it's the mainstream position among economists.