Finance & Development – IMF
In this March 2026 article, Alan J. Auerbach examines the worsening fiscal position of the United States. The analysis contrasts past and present attitudes toward public debt, highlighting a shift from fiscal caution to growing tolerance of deficits. Although the U.S. economy remains strong, rising debt levels and political constraints raise concerns about long-term sustainability.
From fiscal discipline to rising tolerance for debt
The article begins by comparing two periods. In 1990, U.S. debt stood at 43 percent of GNP, and policymakers took action to reduce deficits despite political risks. By contrast, in 2025, debt approached 100 percent of GDP, yet fiscal expansion continued through major legislation. This shift reflects a broader change in attitudes toward debt.
At the same time, structural pressures have intensified. Demographic trends, particularly aging populations, are increasing spending on entitlement programs. Unlike earlier periods, there is no clear mechanism—such as reduced defense spending—to ease fiscal pressures. As a result, deficits are expected to remain high even under favorable economic conditions.
Economic shocks and political constraints
Auerbach identifies two major drivers of rising debt. First, large economic shocks, including the global financial crisis and the COVID-19 pandemic, led to sharp increases in government spending and declines in revenue. These events required substantial fiscal intervention, significantly expanding public debt.
Second, political polarization has made fiscal consolidation more difficult. Reducing deficits often requires unpopular measures such as tax increases or spending cuts. However, partisan divisions limit the ability to reach bipartisan agreements. As a result, policymakers struggle to implement long-term solutions.
Limited immediate pressure and hidden costs
Another factor contributing to fiscal inaction is the absence of visible short-term consequences. Historically, concerns about rising debt focused on higher interest rates. Yet, over the past two decades, declining interest rates offset the impact of increasing debt. Debt service costs even fell as a share of GDP despite rising debt levels.
Nevertheless, underlying risks persist. Higher debt has contributed to external imbalances and may crowd out private investment. These effects are less visible but still significant. Consequently, the lack of immediate pressure reduces the urgency for reform, even as long-term risks accumulate.
Gradual versus sudden fiscal adjustment
The article outlines two possible future scenarios. In a gradual adjustment, rising debt and interest costs could eventually force policymakers to adopt reforms. These might include tax increases, spending cuts, or both, particularly as trust funds such as Social Security face depletion.
Alternatively, a sudden adjustment could occur if borrowing becomes too costly. In this case, financial markets could impose constraints abruptly, limiting fiscal flexibility. Although this scenario appears distant, it remains a risk. The increasing complexity of global debt markets adds further uncertainty.
The article concludes that while solutions exist, political conditions make them difficult to implement. Without renewed bipartisan cooperation, fiscal challenges are likely to worsen over time.
Reference
Auerbach, A. J. (2026, March). America’s perilous fiscal path. Finance & Development, International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/2026/03/point-of-view-americas-perilous-fiscal-path-alan-auerbach