No Silver Bullet

Paths for Reducing the Federal Debt

Quick Summary

America's federal debt is as old as the nation itself, and throughout the past two centuries the debt has fluctuated dramatically, spiking during wars and economic crises and declining during times of peace and prosperity. Once again, it is on an upward climb: As a share of annual gross domestic product (GDP), it is now about three-quarters higher than what it was a decade ago, and in the next 15 years Pew projects that it will reach 95 percent of annual GDP, the highest level since 1947.

Many economists caution that it would be unwise to attack the debt with tax increases or spending cuts while the economic downturn lingers. But nearly everybody agrees that once the economy has recovered, the nation will have to begin to control its debt or face serious economic consequences. The question is, how?

Some insist the problem can be solved simply by raising taxes, without cutting spending; others argue that it can be done by cutting spending, without raising taxes. But No Silver Bullet, a study by the nonpartisan Pew Fiscal Analysis Initiative, illustrates just how difficult it would be to tackle America's fiscal problem by relying exclusively on any single strategy. If action is taken in 2015, when some project the U.S. economy will return to full employment, consider what it would take to reach a debt-to-GDP ratio of 60 percent by 2025 with just one of the following approaches:

  • It would take a 43 percent reduction in discretionary spending, a cut of about $590 billion, a figure roughly equivalent to eliminating the Department of Defense.
  • Spending on entitlement programs such as Medicare, Social Security, Medicaid and certain veterans' benefits would have to be cut by 22 percent.
  • That means that in 2015, the average Social Security beneficiary would receive $985 per month, rather than $1,255.It would take a 32 percent hike in individual income-tax revenues to achieve the 60 percent goal in 2025.
  • That means that the average income-tax liability for every man, woman and child in the U.S. would be $6,520 in 2015 instead of $4,955.
  • Relying just on economic growth, without tax increases or spending cuts, to solve the fiscal problem would require unprecedented productivity gains. In particular, inflation adjusted GDP would have to grow by an average of 4.1 percent annually, instead of the 2.1 percent forecast by the Congressional Budget Office. Such a change would be tantamount to more than doubling America's productivity growth.

In contrast, an approach combining both spending and revenue policies would mean an across the-board tax increase and spending cut of about 7.5 percent in 2015 to achieve the target debt-to-GDP ratio by 2025

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Sarah Leiseca

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