Assessing Fiscal Sustainability

December 31, 2013

Every country faces an intertemporal budget constraint, which requires that its government's future expenditures, including servicing its outstanding official debt, be covered by its government's future receipts when measured in present value. The present value difference between a country's future expenditures and its future receipts is its fiscal gap, says Laurence Kotlikoff, a senior fellow with the National Center for Policy Analysis and economist at Boston University.

To generate an accurate assessment of the US government's fiscal sustainability, Kotlikoff uses both fiscal gap accounting, which discloses the amount of adjustment needed to restore sustainability, and generational accounting, which looks at the impact of current and implied policy on specific generations.

  • The U.S. fiscal gap now stands at $205 trillion.
  • This is 10.3 percent of the estimated present value of all future U.S. gross domestic product (GDP).
  • The United States needs to raise taxes, cut spending or engage in a combination of these policies by an amount equal to 10.3 percent of annual GDP to close its fiscal gap.
  • Closing the gap via raising taxes would require an immediate and permanent 57 percent increase in all federal taxes.
  • Closing the gap via spending cuts (apart from servicing official debt) would require an immediate and permanent 37 percent reduction in spending.

This grave picture of America's fiscal position effectively constitutes a declaration of bankruptcy.

Source: Laurence Kotlikoff, "Assessing Fiscal Sustainability," Mercatus Center, December 12, 2013.

 

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