In principle, solving the nation’s debt problems is easy. Almost all experts agree that a combination of reduced spending and increased tax revenues is needed. Cuts in spending and increases in tax revenues equal to about 5 percent of GDP are required to prevent an increase in the debt-to-GDP ratio. If a constant debt-to-GDP ratio were achieved with spending cuts alone, annual non-interest government spending would have to be reduced by about 20 percent. Alternatively, if a constant debt-to-GDP ratio were achieved by relying solely on increased tax revenues, taxes would have to be raised by about 33 percent. It is impossible to imagine that Congress would ever adopt spending cuts or tax increases of these magnitudes.
The logical conclusion is that only a balanced approach to solving our debt crisis, one that includes both spending cuts and increased taxes, is feasible. That being said, neither spending cuts nor tax increases will be politically easy to enact.
via EconoMonitor : EconoMonitor » “Solving America’s Debt Crisis”.
Only the structural deficit needs to be addressed going forward to realize a balanced budget or even a budget in some surplus. The structural deficit is that deficit remaining after adjustment for increased tax revenues from a full employment economy and reduced expenditures for unemployment and economic stimulus that are related to the current reduced economic activity. Also, recent war expenditures should not be considered as part of the structural deficit.
After accounting for these budget adjustments, and acheiving moderate cost saving in the Social Security and Medicare entitlement programs the remaining cost savings or tax revenue increases are probably less than 5% for each side of the ledger.
Interesting. But what happens if we don’t achieve full employment — what if we undergo a decade of de-leveraging rather than a 12 to 18 month contraction typical of a normal business cycle?