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Robust fiscal stabilisation

Recent fiscal projections for the US forecast a rising debt-GDP ratio which exceeds the peak at the end of World War II. This column shows that over the last 20 years, there is no longer evidence of a stabilising fiscal feedback, where higher projected deficits lead to more deficit reduction. It argues that the current fiscal trajectory is unstable, and adverse fiscal shocks would only worsen the prospects. However, if a gradual fiscal feedback were to be re-established, then the trajectory would be stable. This feedback would imply deficit reductions in the range of 0.5% to 1.1% of GDP over the next decade. […]