Monetary Policy Implications of Greater Fiscal Discipline

After nearly a quarter century of large budget deficits—causing the public debt to double from 20 percent to 42 percent as a share of GDP in the industrialized countries—the need for greater fiscal discipline appears to be reaching a consensus. Last spring a balanced budget amendment to the U.S. Constitution passed in the House of Representatives and came close to passing in the Senate—a swing of only one vote would have made the difference. In June of this year, a Congressional budget resolution, calling for a balanced budget by the year 2002, was agreed to by the House and Senate, with the President disagreeing only about the exact date. In Europe, a key criterion for admission to the European Monetary Union is a substantially reduced budget deficit for many countries. Although structural budget deficits remain large, the chances are now greater than they have been in many years that deficits will decline as a share of GDP and that stronger discipline will be put in place to prevent them from rising again in the future.