Buoyed by substantial policy support and improving financial conditions, the economic recovery is progressing. Monetary policy should remain accommodative to support the economy as fiscal policy tightens, but the ground work for eventual interest rate increases is already being laid, a task that should continue. In the labour market, additional support for job training and enhanced education may be required to reintegrate workers whose skills will become degraded from long periods of unemployment or whose skills will no longer match up with the needs of employers. The reform effort should focus on policies that contributed to the imbalances. In particular, as the housing market recovers and home prices rise, public support to homeownership should be decreased to curb incentives for overinvestment in housing. Implementation of financial reform needs to better address problems of incentives in the banking sector and tackle problems of moral hazard. Higher public and private saving and stronger exports would limit the extent that large current account imbalances reemerge and would support matching efforts that should be taken in surplus countries.

The economic recovery in the United States from arguably the most significant recession since the Great Depression of the 1930s is underway amid substantial economic stimulus (Table 1). Real output has grown at a notable pace since the third quarter of 2009 and net job gains, which typically lag output, turned positive at the start of 2010.

At its most basic level the US recession was brought on by housing and real estaterelated financial problems. Steps that can be taken to strengthen the economy and reduce the likelihood and severity of similar issues in the future include: reducing overinvestment in housing and increasing the resilience of the mortgage market; revising financial supervision; repairing the household balance sheet and reducing the current account imbalance; and ensuring the preservation of labour market flexibility following the current troubles.

The United States faces challenging budgetary prospects, as do most other OECD countries. The federal budget deficit widened considerably during the recession, reaching about 10% of GDP in both 2009 and 2010, reflecting the operation of automatic stabilizers and the policy response to the crisis. Consequently, public debt now stands at its highest level since the early-1950s. The Administration has proposed the objective of stabilising the debt-GDP ratio by 2015, which is realistic in scope and ambition, though it requires fiscal tightening measures which are yet to be identified. In the next decade, the effects of population ageing on entitlement spending will be increasingly felt and the fiscal situation could deteriorate significantly in the absence of structural reforms of pension and, especially, healthcare programmes.

The consensus view of scientists is that the build-up of greenhouse gases (GHG) in the atmosphere is causing global warming. To reduce the probability of severe climate-change impacts and costs occurring, global GHG emissions need to be reduced substantially over coming decades. The United States agreed to a global political agreement to reduce GHG emissions that was acknowledged at Copenhagen (COP15) in December 2009 and negotiations are continuing to work towards binding emissions-reduction commitments by all countries. In view of the scale of emission reductions called for, it is vital that the United States adopt a costeffective and comprehensive climate change policy. The current Administration is endeavouring to put such a policy package in place. Its core elements are comprehensive pricing of GHG emissions and increased support for the development and deployment of GHG-emissions-reducing technologies.