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Monday, January 17, 2005

Long-term fiscal issues

This isn't my usual topic for blogging, but the Sunday Boston Globe had an interesting front page Business & Money section article by Charles Stein called "Social Security is just the tip of a very large iceberg."

Stein talked to a number of economists who are quite pessimistic about government's long-term ability to pay for its spending. Consider the large and growing "fiscal gap" facing America through the lifetime of today's children:
Economists describe the fiscal mess with a more neutral term -- the fiscal gap. What it refers to is the mismatch going forward between tax collections and government obligations. Berkeley economist Alan Auerbach and two colleagues estimated the gap at $36 trillion over the next 75 years. To put that number in some perspective, think about this: If we wanted to fix the problem today, we would have to cut government spending by about 27 percent or raise taxes by about 37 percent and hold at those new levels indefinitely.

"The nation faces a massive and growing fiscal gap," wrote Auerbach and his coauthors in an article published in Tax Notes last year.
Stein says that Bush's tax cuts are responsible for about 15% of the gap. Federal taxes are currently at their lowest level in nearly half a century!

Bush's spending programs are also partly responsible. Does everyone recall the expensive Medicare bill? And the sizable defense spending increases? As guest blogger Paul pointed out last summer, Bush's tax cuts and new spending obviously also result in much higher government debt servicing.

In any case, entitlement growth (especially Medicare and Medicaid) will be a large part of the fiscal gap. Social Security is currently 4.3% of GDP and will be about 6.3% in 2030. Then, apparently, this retirement spending levels off.

However, Medicare and Medicaid are only 3.8% of current GDP, but they'll more than double to 8.3% in 2030 and be a whopping 16.7% by 2080!

So, the US really needs tax increases -- or must cut expenditures even more than it did during the past quarter century.

Average taxpayer: if you think you might be old or sick in 2030, you might want to rethink your current support for tax cuts and cold-war levels of defense spending. As I've blogged before, the aircraft carrier George W. Bush visited to declare "mission accomplished" in Iraq (May 2003) cost more than the entire North Korean defense budget. Add the spending of all of America's enemies and that figure would be a small fraction of America's defense expenditures.

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