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A New Analysis of the Fiscal Gap

Any challenge can be minimized simply by assuming that someone, someday will solve it.     Official projections of future borrowing–such as those by the Congressional Budget Office–are required by Congress to assume that future federal leaders will reduce curb the growth in medical spending occasioned by the retirement of Baby Boomers.

Economists Alan  Auerbach and William  Gale  have recently published a paper giving a more realistic view of what some call “the fiscal gap,”  i.e.,  federal spending in excess of available revenues.     The long term fiscal imbalance

A rough summary of some important points:

(1) Most people agree that the should be  some limit on the share of national income in the public sector–state, local, and federal.   That, in turn, implies a ceiling on tax revenues available to each level of government.  But current federal spending is higher than can be supported by historical levels of federal revenues.

(2)   If the federal government consistently spends more than available revenues, it will runs the risk of compounding interest.   Compound interest rises at an accelerating rate.

(3)  Rising federal medical costs and debt service will crowd out funding for defense and all domestic programs except for trust-funded financed Social Security pensions.  Any form of “tax relief” will also add to debt and ultimately debt service.

Timothy Taylor also provides a good analysis of the magnitude of the gap between federal revenues and spending. Taylor’s analysis of fiscal gap

There is one straightforward way to slow the growth of interest expense:  discontinue borrowing.   That will require a new alignment of tax and spending policies.   My book–to be released April 1–chronicles how federal elected officials from across the political spectrum once  understood and acted on that basic insight and still managed to get re-elected.