NCPA - National Center for Policy Analysis


December 20, 2004

The fiscal gap in the United States (defined as the difference between expected present value of future tax revenues and expected spending and net debt) is an enormous $45 trillion, according to the U.S. Treasury.

The U.S. fiscal gap is roughly 4 times national gross domestic product (GDP) and 12 times the official debt. While up-to-date figures for European countries are unavailable, it is known that the fiscal gaps across the continent, as a share of GDP, are much larger than that of the United States.

One way to put the fiscal gap in the United States in perspective is to ask what it would take to pay it off. Such an analysis was performed by the U.S. Treasury and determined that:

  • In order to pay off the fiscal gap, either federal income taxes must be raised 69 percent, payroll taxes increased 95 percent, or federal discretionary spending must be permanently cut 106 percent.
  • Simultaneously raising income taxes 17 percent, increasing payroll taxes 24 percent, cutting federal purchases 26 percent, and scaling back Social Security and Medicare benefits 11 percent would produce the same result.

Because such options would be incredibly damaging to the U.S. economy, it is possible that inflationary monetary policy would be the most attractive short-term solution, warnsKotlikoff.

Source: Laurence J. Kotlikoff, "Fiscal Policy and the Future of the Euro," Cato Journal, Volume 24, No. 1-2, Summer 2004, Cato Institute.

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