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Monday, September 18, 2006
GAO Report Highlights Magnitude of Fiscal Challenge
Earlier, Matt posted about a GAO report released today about the unsustainability of the federal budget. The report illustrates in six pages the enormity of the challenges the federal budget faces. And it makes clear that even if Congress allows the 2001 and 2003 tax cuts to expire, as is currently the law, the federal government will have to make serious changes to its current fiscal policy. This fact is particularly relevant in light of the fact that Sen. Majority Leader Bill Frist (R-TN) has been desperately trying to push through Congress another $750 billion in tax cuts.
...under GAO’s optimistic simulation the fiscal gap would grow from 4.5 percent of the economy today to 5.7 percent in 2016 simply by waiting to act."
In other words, in order to simply maintain the current level of debt (relative to the size of the economy), the federal government would have to raise taxes or cut spending (or a combination of the two) by $600 billion today, and then maintain this level of revenue and spending (relative to the size of the economy) for the next 75 years. If the government procrastinates, as the current administration and Congress are wont to do, that number grows to $1 trillion (in today's dollars) in 2016.
Waiting longer, of course, means even more drastic changes.
...waiting until 2040 means that as a share of the economy, either taxes would need to be increased by almost 60 percent or total spending reduced by a third in order to balance the budget in that year. Sudden, drastic changes of either kind--and revenues at such a level--are outside post-World War II historical experience in this country. "
And, like every other report issued by the federal government - be it CBO, GAO, Treasury, or even the president's own budget - this document puts another nail into the supply-sider coffin.
Additional economic growth is critical and will help to ease the burden, but the projected fiscal gap is so great that it is unrealistic to expect we will grow our way out of the problem. To do so under any reasonable set of assumptions would require double-digit real economic growth for many decades to eliminate the long-term fiscal challenge. However, since the end of World War II we have not seen economic growth of this kind.
To bring some context to that statement: On average, the economy has grown 3.4% per year since WWII; at the eight of "dot com" boom of the roaring 90's, economic growth peaked at 4.4% per year.
The points here are that 1) we can make changes that will bring sustainability back to the federal budget and that 2) waiting to make these changes has very real consequences on the kinds of policy options available to us.
Posted by Craig Jennings
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