NCPA - National Center for Policy Analysis

How to Balance the Budget without Raising Taxes

December 9, 2010

Our post-World War II experience shows that if the government is going to live within its means, it can't spend much more than 18 percent of gross domestic product (GDP).  The current budget situation is a bipartisan disaster that requires immediate action, according to Nick Gillespie, editor in chief of Reason.tv and Reason.com, and Veronique de Rugy, an economist at the Mercatus Center at George Mason University.

  • Since Bill Clinton left the White House in 2001, total federal spending has increased by a massive 60 percent in inflation-adjusted 2010 dollars.
  • In fiscal year 2010, the federal government spent $3.6 trillion, or 25 percent of GDP -- that's the most spending, in terms of percentage of GDP, since 1946.
  • Likewise, last year's $1.5 trillion deficit, as a percentage of GDP, was the largest deficit since 1945.

Most economists talk about a debt-to-GDP ratio of 60 percent as a trigger point that makes investors very nervous about a country's ability to pay its obligations.  The debt to GDP ratio was 63 percent this year and the Congressional Budget Office (CBO) projects it will be 87 percent in 2020.  Just three years ago, it was 36.5 percent.

So, what would it take to bring federal spending into line with plausible levels of revenue?

A balanced budget in 2020 based on 19 percent of GDP (based on the long-term CBO budget outlook) would mean $1.3 trillion in cuts over the next decade, or about $129 billion annually out of budgets averaging around $4.1 trillion.  

The specific cuts should be open to negotiation, but the historical record shows that the available level of government revenue is fixed, say Gillespie and de Rugy.

Source: Nick Gillespie and Veronique de Rugy, "How to Balance the Budget without Raising Taxes," Reason Magazine, December 5, 2010.

For text:

http://reason.com/archives/2010/12/05/how-to-balance-the-budget-with

 

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