U.S. Debt Continues to Grow

August 10, 2012

The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones, say Laurence Kotlikoff, an economist at Boston University, and Scott Burns, a syndicated columnist.

Some question whether "official" and "unofficial" spending commitments can be added together. For its part, economic theory sees through labels and views a country's official debt for what it is -- a linguistic construct devoid of real economic content. In contrast, the fiscal gap is theoretically well-defined and invariant to the choice of labels. Each labeling choice changes the mix of obligations between official and unofficial, but leaves the total unchanged.

  • The U.S. fiscal gap, calculated using the Congressional Budget Office's (CBO) realistic long-term budget forecast -- the Alternative Fiscal Scenario -- is now $222 trillion
  • Last year, it was $211 trillion.
  • The $11 trillion difference -- this year's true federal deficit -- is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.

This fantastic and dangerous growth in the fiscal gap is not new.

  • In 2003 and 2004, economists Alan Auerbach and William Gale extended the CBO's short-term forecast and measured fiscal gaps of $60 trillion and $86 trillion, respectively.
  • In 2007, the first year the CBO produced the Alternative Fiscal Scenario, the gap stood at $175 trillion.
  • By 2009, when the CBO began reporting the Alternative Fiscal Scenario annually, the gap was $184 trillion.
  • In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.

Part of the fiscal gap's growth reflects changes in policy, such as the Bush and Obama tax cuts, the introduction of Medicare Part D, and the expansion of defense spending. Part reflects "natural" growth of existing programs, including growth in Medicare and Medicaid reimbursement rates. And part reflects the demographic time bomb U.S. politicians are blithely ignoring.

Closing the gap using taxes requires an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the United States needs to cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. What the government can't do is pay its bills by spending more and taxing less.

Source: Laurence Kotlikoff and Scott Burns, "Blink! U.S. Debt Just Grew by $11 Trillion," Bloomberg, August 8, 2012.

 

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