Fiscal gap

The fiscal gap is a comprehensive measure of a government's total indebtedness. Proposed by economists Laurence Kotlikoff and Alan Auerbach, it is defined 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 assets.^[1] This 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 is closely related to the fiscal gap. It measures the burden on today's and tomorrow's children of closing the fiscal gap assuming that current adults 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.

Neither fiscal gap nor generational accounting are perfect measures of fiscal sustainability or generation-specific fiscal burdens. But they offer significant advantages relative to conventional measures of official debt. First, they are comprehensive and forward-looking. Second, they are based on the government’s intertemporal or long-term budget constraint, which is a mainstay of economic models of fiscal policy. Third, neither generational accounting nor fiscal gap accounting leave anything off the books.

Fiscal gap accounting and generational accounting 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 U.S. fiscal gap

Fiscal gap accounting is not new to the U.S. government. The Social Security Trustees and Medicare Trustees have been presenting such calculations for their own systems for years in their annual reports. And generational accounting has been included in the President's Budget on three occasions.

According to recent IMF and CBO projections, the U.S. fiscal gap is far larger than the official debt and compounding very rapidly. The longer we wait to close the fiscal gap, the more difficult will be the adjustment for ourselves and for our children. This said, acknowledging the government's fiscal gap and deciding how to deal with it does not rule out productive government investments in infrastructure, education, research, or the environment, or in pro-growth tax reforms.

Based on calculations using the 2012 Alternative Fiscal Scenario long-term projections by the Congressional Budget Office, some estimate the U.S. fiscal gap stands to be $222 trillion - more than 13 times larger than the reported U.S. National Debt. According to the same estimates, the gap grew $11 trillion from 2011 to 2012. Eliminating the entire U.S. fiscal gap through revenue alone would require a permanent 64% increase in all federal taxes. Alternatively, closing the gap through spending reductions alone would require a permanent 40% cut in all federal purchases and transfer payments.^[2]

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