A new report, "Analyzing the US government's fiscal gap," prepared by EY's Quantitative Economics and Statistics (QUEST) Group on behalf of the Peter G. Peterson Foundation, finds that the federal government's fiscal position will become increasingly precarious over the next several decades. The widening fiscal gap, which reflects increasing annual federal deficits and accumulation of federal government debt, could have significant negative consequences for the US economy with:

— Decreased national saving and future income
— Growing pressure to increase taxes or cut spending
— Reduced ability to respond to domestic and international events
— Greater risk of a fiscal crisis

The "fiscal gap" measures the extent by which a government's commitments (e.g., spending, debt obligations) exceed its resources (e.g., revenues) over a period of time.

By analyzing several time periods (i.e., 25-year, 50-year, 75-year periods), the analysis illustrates how the fiscal gap worsens as federal deficits and debt grow relative to the size of the US economy over time. Using different debt-to-GDP ratios acknowledges that the fiscal gap in part reflects long-term spending and revenue policy choices. Presenting estimates based on both current law and current policy for each time period recognizes that there is uncertainty about both future spending and tax policies.

Key findings of the report

Size of the fiscal gap

The United States faces a large, but fixable, fiscal gap. Under the assumption that federal government debt is reduced to its historical share of GDP (38%) by the end of the projection period, the fiscal gap (in 2015 dollars) reflects the degree that outstanding debt exceeds this marker and is estimated as follows:

— 25-year fiscal gap: $13 trillion ($41,100 per person) under current law and $22 trillion ($67,400 per person) under current policy

— 50-year fiscal gap: $21 trillion ($64,000 per person) under current law and $56 trillion ($171,200 per person) under current policy

— 75-year fiscal gap: $30 trillion ($92,100 per person) under current law and $103 trillion ($318,300 per person) under current policy

To put these numbers in perspective, US per capita income was $56,000 in 2015.

Size of the required policy changes

Significant changes in budget policy will be needed to close the fiscal gap. To reduce debt to its historical share of GDP (38%) within 50 years, the report estimates that the following changes would be required:

— If lawmakers relied only on federal revenues to close the fiscal gap, revenues would need to be increased 11% under current law and 33% under current policy; delays increase the required revenue increases.

— If lawmakers relied only on spending cuts to close the fiscal gap, spending (excluding interest) would need to be reduced by 11% under current law and 25% under current policy; delays increase the required spending reductions.

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ATTACHMENT

Full text of the report