Fiscal Consolidation: Lessons for the United States

How should the United States respond to its unsustainable fiscal outlook? How and when a country should fiscally consolidate depends on its existing circumstances, policies, and institutions. We review the experiences of other countries that attempted consolidations and highlight lessons applicable to the United States. We find that (1) the United States does not face a short-term crisis, so it can employ gradual adjustments, which may minimize short-term harm, (2) consolidation should occur in a strong economy with monetary accommodation, and (3) tax increases (spending cuts) could plausibly play a larger (smaller) role in US consolidations than in European adjustments.