urban institute nonprofit social and economic policy research

Will It Take a Crisis to Fix Fiscal Policy?

Read complete document: PDF

PrintPrint this page
Share on Facebook Share on Twitter Share on LinkedIn Share on Digg Share on Reddit
| Email this pageE-mail
Document date: February 04, 2011
Released online: February 04, 2011


Unless current policies are reformed, the national debt will continue to grow relative to GDP until a sovereign debt crisis, like those in Ireland and Greece, is inevitable. Although the nation is becoming more concerned about spiraling debt and a presidential fiscal commission and other groups have suggested reforms, the president and congressional leaders have been unwilling to recommend specific policy reforms. Consequently, it is becoming more and more likely that policymakers will not undertake necessary reforms until a financial crisis forces their hand. (This paper will appear in the April 2011 issue of Business Economics.)

The text below is an excerpt from the complete document. Read the entire report in PDF format.

The Size of the Problem

It is not a pretty picture. Unless U.S. fiscal policy is changed dramatically, the national debt will grow at an increasing rate and far outpace economic growth. Using a reasonable definition of current policy, the Congressional Budget Office (CBO 2010) projects that the national debt in the hands of the public will reach 185 percent of the gross domestic product (GDP) by 2035. Of course, those buying our debt will likely go on strike long before we reach that point.

Federal Debt Held by the Public under CBO's Alternative Fiscal Scenario: 2011-2035

The arithmetic underlying CBO's projection is extremely simple. Two program areas—Social Security and health—will be responsible for about 50 percent of total federal spending once the stimulus program of 2009 phases out. Spending in both areas is rising faster than GDP and faster than tax revenues. Tax revenues, on the other hand, have been remarkably constant historically, varying between 17 and 19 percent of GDP for all but 11 of the past 50 years. If programs other than Social Security and health and the tax burden remain roughly constant relative to GDP, the deficit and the national debt will grow rapidly. Eventually, the interest cost of the debt begins to dominate the budget and ultimately the system explodes.

End of excerpt. The entire report is available in PDF format.

Topics/Tags: | Economy/Taxes

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact publicaffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.

Email this Page