US recovery could suffer setback, warns Orszag

America may still suffer a major setback to its economic recovery, the former director of the US Office of Management and Budget warns.

Peter Orszag, a vice chairman of global banking at Citigroup and former advisor to the Obama administration, has warned America to ‘brace itself for turbulance’ in today’s Financial Times.

Orszag argues that the severity of fiscal risk varies considerably depending on which level of government is under discussion.

At a local level, there is a strong possibility of American cities declaring bankruptcy that could lead to a severe crisis. The potential problems arise when a city that hypothetically defaults sets off a chain reaction of events, triggering others. (article continues below)

At a federal level, a combination of labour market weaknesses and structural budget deficits demand increased levels of stimulus and deficit reduction to take effect within the next three years.

Orszag warns it is difficult to see how the medium-term federal deficit can be reduced to levels that are sustainable without increasing tax revenues generated from among earners of under $250,000 (£157,000).