The US Budget Deficit: On an Unsustainable Path

Peter R. Orszag and William G. Gale

Fiscal policy in the United States is on an unsustainable path. Under reasonable projections, the budget deficit is likely to amount to about 3.5 per cent of Gross Domestic Product (GDP) in each year over the next decade. Thereafter, deficits are likely to grow much larger, as health and retirement costs mount for the baby boom generation. Over the next 75 years, the nation’s fiscal gap could amount to about seven per cent of GDP.

At best, these deficits will gradually harm the future income of Americans. At worst, they could trigger a fiscal crisis, which could accelerate and possibly exacerbate the damage. In this article, we examine trends in US fiscal policy, reasonable projections of future fiscal policy and the implications. We pay particular attention to whether the 2001 and 2003 tax cuts should be made permanent, since that question is being actively debated in the US and the outcome has a substantial effect on the fiscal outlook.