This Bloomberg Government Study reveals that the size of the deficit-reduction package under most serious consideration in Washington — a $4 trillion combination of spending cuts and tax increases over 10 years — would be inadequate to put the nation’s fiscal house in order.
This study finds that it will take almost $6 trillion in deficit reduction during the next decade to make a minimum down payment that puts the nation on a sounder fiscal footing. In addition, this study demonstrates it will take a $9 trillion deal — more than double the current level being discussed — to ensure the country’s long-run fiscal soundness as the demands of an aging population and rising health-care costs put more strains on the federal government.
Bloomberg Government is using that critical measure of economic vibrancy, the nation’s debt-to-GDP ratio — the relationship of a country’s debt to its gross domestic product, or overall economic output — to examine the impact of multiple deficit-reduction scenarios over 10 years.
As President Barack Obama and Congress negotiate to reach agreement on a comprehensive, effective and enforceable package to reduce the growing federal budget deficit, Bloomberg Government will publish a series of studies about the potential economic and business impacts of a final budget plan.
The major findings in this first of four parts are:
- A package most likely to be put in place — $4 trillion in reductions over 10 years — would not stabilize debt-to-GDP in 2022 at the 2012 level of about 73 percent. The $4 trillion plan results in a 2022 ratio of 80.2 percent.
- To stabilize the debt-to-GDP at 2012 levels, $5.9 trillion in deficit reduction would be required, or 48% more than the $4 trillion plan being discussed.
- A 60 percent debt-to-GDP ratio is considered a more financially sound level for countries to maintain. To achieve that level in 2022, $9 trillion in deficit reduction would be necessary, or more than double the $4 trillion plan.
This study uses the latest macroeconomic assumptions about GDP growth, inflation and interest rates from the Congressional Budget Office, the nation’s official legislative budget scorekeeper. This study’s multiple scenarios project the nation’s fiscal soundness for the next 10 years, and they also enable subsequent studies to assess the economic and business implications of deficit reduction.
To access this complete study, as well as the next three installments, request a free trial of the Bloomberg Government information service.
Robert Litan is Bloomberg Government’s director of research. He previously worked at the Kauffman Foundation as vice president for research and policy and at the Brookings Institution as a senior fellow. During the Clinton administration, he served as deputy assistant attorney general at the Department of Justice and then as associate director of the Office of Management and Budget. Litan received a B.S. in economics from the University of Pennsylvania, a J.D. from Yale Law School, and a master’s and Ph.D. in economics from Yale University.
Tony Costello is Bloomberg Government’s lead analyst. He spent four years as a buyside investment analyst covering energy at Osprey Partners and Mooring Financial. In these positions, Costello evaluated energy-related securities and made recommendations to portfolio managers. His undergraduate degree is in finance from George Washington University and he holds an MBA from The Darden School at the University of Virginia.
Chris Payne is a senior economic analyst with Bloomberg Government. After getting his Ph.D. at the London School of Economics, he served as a research fellow at Duke University. Payne worked as a CPA at PricewaterhouseCoopers and was a vice president at JPMorgan Securities covering Asian emerging markets. He also has a master’s from the London School of Economics and a B.A. from Cambridge University.
Patrick Driessen is a taxation policy analyst for Bloomberg Government, which he joined after a career as an economist and revenue estimator at the Joint Committee on Taxation and the Treasury Department. Driessen received a Ph.D. from the University of Michigan, and specializes in international and accounting tax issues as well as the tax legislative process.