By John Shaw

WASHINGTON (MNI) - The Center for a Responsible Federal Budget, a respected budget watchdog group, said in a new report the U.S. should act now to develop a serious deficit reduction plan and can usefully draw on a host of international examples to guide policymakers on the size, composition and timing of such a package.

In a policy paper, the budget group said that American fiscal policy is hurtling in the wrong direction, adding the U.S.'s public debt is set to grow from 55% of gross domestic product today to 87% by 2020.

"Without significant adjustment, debt is projected to continue heading upward, hitting 181% of GDP in 2035," it said.

"Creditors of the U.S. are understandably nervous about the country's projected debt path. Domestic bondholders and foreign creditors have increasingly expressed concern over the U.S. fiscal situation," it said.

The Center for a Responsible Federal Budget said that American policymakers face a difficult task: to put future U.S. fiscal policy on a more sustainable path without risking the economic recovery.

It said that a strong deficit reduction plan in the U.S., which is agreed to now but phased-in later, is a "key component of both keeping the economic recovery on track and avoiding a future fiscal crisis."

The budget group said the current scope of the nation's fiscal challenges are daunting.

"The circumstances facing the United States, while unprecedented in our fiscal history, are not unique," it said, adding that other countries have had to dig out of very serious fiscal problems.

The report assesses the fiscal challenges that confronted Denmark (1983-6), Ireland (1982-84, 1986-89), Finland (1992-2000), Spain (1993-97) and Sweden (1994-2000).

From these experiences, the budget group said, the U.S. should draw some lessons.

These include that nations with fading fiscal credibility can bolster themselves with strong deficit reduction plans; an announcement of a credible deficit reduction plan can have positive effects on businesses, consumers and financial markets; the most successful plans have involved a large, multi-year adjustments, but the composition of the plans has varied; deficit reduction should be phased in gradually; a crisis can make it easier to push deficit reduction; and nations should make fiscal adjustments "before they are forced upon you by creditors."

Perhaps the most encouraging observation the budget group makes is that nations sometimes are able to launch the most aggressive and sustainable programs when their fiscal situations become dire.

"The public is more likely to see the benefits of responsible fiscal policy and support a tough program when times are obviously precarious," it said.

"Contrary to conventional wisdom, fiscal consolidation (deficit reduction) can be politically popular in certain circumstances," it added.

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