The fiscal gap is a measure of a government's total indebtedness proposed by economists Laurence Kotlikoff and Alan Auerbach, who define it as the difference between the present value of all of government's projected financial obligations, including future expenditures, including servicing outstanding official federal debt, and the present value of all projected future tax and other receipts, including income accruing from the government's current ownership of financial assets1 According to Kotlikoff and Auerbach, the "fiscal gap" accounting method can be used to calculate the percentage of necessary tax increases or spending reductions needed to close the fiscal gap in the long-run
Generational accounting, an accounting method closely related to the fiscal gap, has been proposed by the same authors as a measure of the future burden of closing the fiscal gap The "generational accounting" assumes that current taxpayers are neither asked to pay more in taxes nor receive less in transfer payments than current policy suggests and that successive younger generations' lifetime tax payments net of transfer payments received rise in proportion to their labor earnings
According to Kotlikoff and Auerbach, "fiscal gap accounting" and "generational accounting" reports have been done for roughly 40 developed and developing countries either by their treasury departments, finance ministries, or central banks, or by the IMF, the World Bank, or other international agencies, or by academics and think tanks
Size of the US fiscal gapedit
Fiscal gap accounting is not new to the US governmentcitation needed The Social Security Trustees and Medicare Trustees have been presenting such calculations for their own systems for years in their annual reportscitation needed And generational accounting has been included in the President's Budget on three occasionscitation needed
Based on calculations using the 2012 Alternative Fiscal Scenario long-term projections by the Congressional Budget Office, some estimate the US fiscal gap stands to be $222 trillion – more than 13 times larger than the reported US National Debtcitation needed According to the same estimates, the gap grew $11 trillion from 2011 to 2012citation needed Eliminating the entire US fiscal gap through revenue alone would require a permanent 64% increase in all federal taxescitation needed Alternatively, closing the gap through spending reductions alone would require a permanent 40% cut in all federal purchases and transfer payments2
Criticism of fiscal gap accountingedit
The proposed "fiscal gap" accounting method has been criticized as fundamentally flawed by economists Dean Baker,3 Bradford DeLong,4 and Paul Krugman5 Their critiques, referenced above, center on the fact that fiscal gap accounting calculates the growth future debt in current account terms, without taking into account the fact that future GDP will also grow proportionately, with the result that future debt will fall on generations with substantially larger incomes to cover the debt, obviating the seeming fiscal impossibility of covering the gap
- ^ "The Federal Government's Long-term Fiscal Outlook: Spring 2012 Update" PDF Government Accountability Office Retrieved 4 August 2013
- ^ Kotlikoff, Burns "Blink! US Debt Just Grew by $11 Trillion" Bloomberg Retrieved 25 July 2013 CS1 maint: Uses authors parameter link
- ^ Dean Baker, "Larry Kotlikoff Tells Us Why We Should Not Use Infinite Horizon Budget Accounting", Beat the Press blog, 31 July 2014 accessed 9 October 2015
- ^ J Bradford DeLong, "Oh Dear Larry Kotlikoff Fails to Read: Let's Make This This Week's Monday Smackdown", Grasping Reality blog, August 04, 2014 accessed 9 October 2015
- ^ Paul Krugman, "Quadrillions and Quadrillions", The Conscience of a Liberal blog, 2 August 2014 accessed 9 October 2015
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