In the aftermath of the One Big Beautiful Bill Act of 2025, it is widely understood that the U.S. is on an unsustainable fiscal path absent policy changes. The ratio of debt to gross domestic product (GDP) is projected to rise substantially and inexorably over the next several decades, with no natural turning point. Even if continually rising debt does not trigger a crisis, it will gradually make it harder to grow the economy, boost living standards, respond to wars or recessions, address social needs, or maintain the nation’s role as a global leader.
How should U.S. policymakers respond? In a new paper, we explore options for “fiscal consolidation,” the term used for countries’ efforts to address a short-term fiscal crisis or a long-term fiscal imbalance through tax or spending changes. The timing and design of consolidation depend largely on a nation’s specific institutions, macroeconomic conditions, and past policy choices. We review the literature on how other countries in the Organisation for Economic Cooperation and Development (OECD) have consolidated to understand which policies worked under which conditions. We then explore their unique implications for the U.S.
3 keys to thinking about fiscal consolidation
First, consolidations implemented during economic booms rather than recessions may have less damaging short-run output effects. Consolidations that are gradual and delayed appear to be more effective, while those that are heavily front-loaded tend to be less effective.
Second, consolidations appear to reduce short-run GDP by less when they rely on spending cuts rather than tax increases. However, this may not generalize to all levels or types of spending and taxes. Research suggests that spending cuts have larger negative aggregate effects when they reduce public investment and government purchases. Revenue increases, meanwhile, have smaller negative aggregate effects when they start from lower initial tax levels, focus on less distortionary taxes, and/or expand the tax base rather than raise tax rates.
Third, accommodative monetary policy (and wage policy, in countries where collective bargaining covers much of the work force) can help ameliorate the short-term impacts of consolidations.
What does this mean for US fiscal consolidation?
These three findings imply that the U.S. could rely more on tax increases than spending cuts compared to other advanced economies. The U.S. does not currently face a short-term crisis, and it has persistently maintained lower taxes (at all levels of government) than the OECD average. The U.S. also maintains very substantial personal and corporate income tax expenditures that could be reduced.
Moreover, its consumption, energy, and environmental taxes are particularly low; the literature suggests such taxes could be raised with less distortionary effects than income tax increases or wealth taxes. Likewise, spending (especially on families) has been persistently lower in the U.S. compared to other OECD countries. If spending has diminishing marginal returns, cuts in social spending would have larger negative effects in the U.S. than in other countries.
A tax increase that raised prices—such as the creation of a value-added tax—would likely be accompanied by more accommodative monetary policy in the U.S. than in European countries. That’s because the Federal Reserve must promote both stable prices and full employment, while the European Central Bank (ECB) aims primarily to fight inflation. Moreover, the ECB is less likely to respond to country-specific fiscal policies than the Fed is to national policies. This is another reason the U.S. could plausibly rely on tax increases to a greater extent than other countries have.
U.S. policymakers face other considerations as well. In many cases, expenditure-based consolidations tend to be particularly regressive, with tax-based consolidations typically resulting in more progressive distributional outcomes—yet another reason for the U.S. to focus more on tax increases. Additionally, consolidations often come with political costs. These costs can be limited, however, by starting the consolidation during a period of strong economic growth and shortly after an election, when political capital tends to be the highest. Finally, political risks, including those associated with declining central bank independence, may cause fiscal conditions to change rapidly, potentially requiring similarly rapid action.
Together, our findings suggest that U.S. policymakers should not simply adopt conclusions from prior literature on fiscal consolidation. Instead, they should interpret that evidence in light of the United States’ unique circumstances. A gradual, phased-in plan that leans more on tax increases than spending cuts may offer the best path toward sustainable fiscal policy.