Tuesday, February 24, 2009

Clive Crook on Long-Term U.S. Fiscal Costs

While supportive of the short-term fiscal stimulus, Clive Crook cautions that we should be thinking seriously about the long-term fiscal health of the United States. He is glad, therefore, that President Obama is spending so much time this week discussing this issue, but wonders if the conversation will be frank on the tough fiscal choices the nation faces over the long-haul:
This year’s budget deficit will be about $1,400bn (€1,090bn, £977bn) or roughly 10 per cent of gross domestic product. This comprises $1,200bn, as recently estimated by the independent Congressional Budget Office, plus another $200bn from the first year of the fiscal stimulus. What happens after that? A new analysis for the Brookings Institution by Alan Auerbach and William Gale estimates that the deficit will average at least $1,000bn a year over the next decade – and this on the basis of some pretty optimistic assumptions.

It assumes an orderly recovery, much as from previous recessions: no lost decade of slow growth. It assumes that the provisions in the stimulus law expire when the act says, even though the administration and Congress hope to make many of them permanent. It takes no account of new outlays under the housing plan or the forthcoming financial stability plan. And it assumes the administration does not embark on comprehensive healthcare reform, even though the White House insists it will.

Even under these favourable assumptions, an annual deficit of $1,000bn or more persists. The Auerbach-Gale study also looks further ahead and estimates a “long-term fiscal gap” – “the immediate and permanent increase in taxes” that would be needed to keep the ratio of government debt to GDP constant at its current level. Under those same favourable assumptions, the necessary tax increase is between 7 per cent and 9 per cent of GDP, about equal to the take of the present federal income tax.

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