the start of the trade deficit coincided with a fall in national saving . this development can be explained by the expansionary fiscal policy in the 1980s. with the support of president reagan , the U.S. congress passed legislation in 1981 that substantially cut personal income taxes over the next three years. because these tax cuts were not met with equal cuts in government spending , the federal budget went into deficit . these budget deficit were among the largest ever experienced in a period of peace and prosperity,and they continued long after reagan left office . according to our model , such a policy should reduce national saving , there by causing a trade deficit. and, in fact ,that is exactly what happened .because the government budget and trade balance went into deficit at roughly the same time , these shortfalls were called the twin deficits.