If you’re not aware of it, I’d like to draw your attention to a publication of the Treasury Department, the Financial Report of the U. S. Government for 2012. It makes for sobering reading, particularly the projections part beginning around page 136. I find their assumptions of roughly 5% nominal growth, more than 2% real growth, and 5% Medicare spending growth per recipient unduly rosy. Even with those assumptions Treasury characterizes the situation as “unsustainable”:
The projections in this Report indicate that current policy is not sustainable. The debt-to-GDP ratio is projected to reach 395 percent in 2087 and to rise continuously thereafter. Preventing the debt-to-GDP ratio from rising over the next 75 years is estimated to require some combination of spending reductions and revenue increases that amount to 2.7 percent of GDP over the period. While this estimate of the “75-year fiscal gap” is highly uncertain, current fiscal policies cannot be sustained indefinitely.
It is important to address the Government’s fiscal imbalances soon. Delaying action increases the magnitude of spending reductions and/or revenue increases necessary to stabilize the debt-to-GDP ratio. Relative to a reform that begins immediately, for example, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap is nearly 20 percent larger if reforms are delayed by just ten years, and more than 50 percent larger if reform is delayed 20 years.
I might add that increasing the tax rates is hard enough but increasing the effective rates is something else again.
My general feeling from the report is that Treasury also assumes an abandoning of Keynesian “pump-priming” in reaction to economic downturns, an assumption I find unrealistic in the extreme. I may post more on that aspect later.