The Need for Better Forecasting in Federal Debt Levels
March 21, 2011
There is broad consensus among American citizens, elected representatives and federal administrators that the U.S. government is on a fiscally unsustainable path. Our national debt is currently 62 percent of the value of all goods and services produced in the U.S. economy and, absent concerted action, it could reach an amount in excess of 100 percent of gross domestic product (GDP) by 2020, threatening stability and prosperity at home and abroad, says Margaret M. Polski of the Mercatus Center.
U.S. government estimates suggest that growing public debt threatens the stability of the financial system. However, there is wide variability across estimates of the size and trajectory of federal debt levels and the forecasting track record is poor.
- While there are many challenges associated with improving the U.S. government's financial position, experience demonstrates that progress can be achieved with effective budgeting, financial planning and policymaking.
- However, each of these exercises requires sound estimates of needs, events and trends: We can't make good decisions about allocating and managing public revenues if we do not have a good understanding of our current situation and how it may change over time.
Conventional analytical techniques consistently fail to produce useful forecasts or policy direction for the U.S. political economy. Major sources of uncertainty over the next 25 years include legislative actions, particularly those related to tax and spending rates; the impact of structural change in the global economy on domestic economic growth, which affects incomes, revenues and prices; military and emergency spending; and mandatory spending on veterans benefits, government retirement benefits, Social Security and health care costs.
Source: Margaret M. Polski, "Improving the Accuracy of U.S. Government Debt Estimates," Mercatus Center, March 2011.
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