US economy turns the corner on private-sector debt

The US economy has largely completed its process of debt repayment in the private sector that began as a consequence of the global financial crisis, a former director of the US Congressional Budget Office says.

The rate of fiscal consolidation at the US state and local government level was also near the end of its cycle.

Peter Orszag, who served as director of the Office of Management and Budget in the Obama administration, said those two aspects bode well for the US economy because the country's pace of annual growth now had a chance of rising above 3 per cent next year.

A graduate of the London School of Economics and Princeton University, Mr Orszag is vice-chairman of investment banking with US banking major Citigroup.

He will appear at a conference on Tuesday morning with Reserve Bank governor Glenn Stevens.

"Those two factors were the primary constraints on US economic activity up until this calendar year, but they're mostly done," he said on Monday.

That means the major impediment to US economic growth now is the level of fiscal consolidation at the federal level.

"If it wasn't for that federal sector, the US economy would be growing beyond 3 per cent a year, but thanks to the drag it's around 2 per cent a year," Mr Orszag said. "The good news is that that federal fiscal drag will diminish this year ... but that could be changed by another demonstration of political disruption, as we've just lived through."

Mr Orszag also said he believed the US Federal Reserve would begin to reduce the pace at which it was printing money in the US spring and that so-called tapering would be finished by the northern autumn "with rate hikes to follow in 2015".

That depends on the level of civility in the next round of argument about the US debt ceiling. "A rule of thumb is: Drama means delay [for] taper," he said. "If come ... January-February we have another showdown, I find it difficult to see how the Fed tapers in the midst of all of that."

But the consensus in the US at the moment seemed to be that the next round of fiscal debates would not be as dramatic as the one the world had just lived through.

The federal fiscal drag this calendar year would be between 1.5 and 1.75 percentage points of gross domestic product, Mr Orszag said.