Long-Term Measures of Fiscal Imbalance (CRS Report for Congress)
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| Release Date |
Aug. 23, 2006 |
| Report Number |
RL33623 |
| Report Type |
Report |
| Authors |
D. Andrew Austin, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
Short-term budget estimates, while critical for program administration and congressional spending decisions, provide a partial and potentially misleading impression of the federal government's fiscal situation. On the other hand, long-term measures have their own limitations. On the positive side, they indicate the magnitude of long-term budget imbalances resulting from the gap between future federal tax revenues and the costs of providing retirement and health care for the baby-boom generation. However, long-term projections are subject to substantial uncertainties for two reasons. First, statistical theory implies that expected forecasting error is larger for more-distant events because errors accumulate over each period into the future. Second, the structure of the economy changes over time, so that assumptions based on the past behavior of the economy may not hold in the future. Thus short-term measures, which are relatively certain but which ignore future imbalances, must be used in conjunction with long-term measures, which indicate the size of future imbalances, but with more variability, in order to gain an accurate picture of the fiscal challenges facing the federal government. Long-run fiscal projections depend on determinants of economic growthâsuch as productivity, and increases in capital stock and labor forceâand the growth of health care costs.
This report describes and analyzes several measures of the long-term fiscal condition of the federal government. The strengths and limitations of long-term, short-term, and medium-term fiscal measures are discussed. The report then provides an overview of the federal government's long-term fiscal situation.
Most independent analysts believe the federal government's fiscal position is more accurately summarized by projections that modify the Congressional Budget Office baseline by assuming the reach of the alternative minimum tax (AMT) will be capped at present levels, that tax cuts slated to expire in 2010 will in fact be extended, and that discretionary spending will keep pace with overall economic growth. Seventy-five-year projections employing these alternative assumptions put the long-term fiscal gap between revenues and spending at 7%-8% of gross domestic product (GDP). Fiscal gap is defined as the size of the immediate and permanent increase in tax revenues or decrease in non-interest expenditures needed to ensure that the public debt to GDP ratio at the end of the budget window is the same as the initial public debt to GDP ratio. These modified-baseline projections indicate that putting federal fiscal policy on a sustainable path for the next 75 years requires substantial increases in taxes, decreases in spending, or both. Changes needed to maintain a permanently sustainable fiscal stance would be even greater.
This report will be updated as events warrant.
