Assessing Fiscal Sustainability

22 Pages Posted: 7 Jun 2018

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: 12/12/2013

Abstract

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. The US fiscal gap now stands at $205 trillion. This is 10.3 percent of the estimated present value of all future US 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.

Suggested Citation

Kotlikoff, Laurence J., Assessing Fiscal Sustainability (12/12/2013). MERCATUS RESEARCH, Available at SSRN: https://ssrn.com/abstract=3191355 or http://dx.doi.org/10.2139/ssrn.3191355

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

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Gaidar Institute for Economic Policy

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