On e21, Donald Marron writes about a recent IMF analysis that compares the budget deficits of 22 advanced countries. Donald explains how the U.S.’s budget outlook might look quite grim, but we’re still not as badly off as Japan, the U.K., Ireland, and Spain. In order to get the debt to a more sustainable level, the IMF says the U.S. government deficit would have to be reduced by 8.8 percent of GDP over the next ten years, or about 0.9 percentage points per year. That’s not nearly as bad as Japan’s required 13.4 percent of GDP closing of the gap, but Donald thinks it’s still really bad (emphasis added):
To put that adjustment in context, note that the U.S. economy currently totals a bit more than $14 trillion. To reduce borrowing by 0.9% of GDP, one-year’s target in the IMF scenario, the government would thus have to cut spending or increase taxes by about $120 billion per year on a permanent basis. That’s equivalent to half of federal spending on Medicaid in 2009. And then the government would have to enact similar, permanent spending cuts and tax increases in each of the nine following years.
But the IMF calculates that required fiscal-gap reduction based on the launching off point of 2009-10 fiscal policy. For the U.S., that counts the very costly and deficit-financed Bush (2001 and 2003) tax cuts. But those tax policies expire at the end of 2010, and as the CBO budget outlook shows (in Table 1-7), the cost of extending the Bush tax cuts alone (not even counting the cost of extended alternative minimum tax relief) is more than double that $120 billion per year requirement. And that fact alone held up against Donald’s example of that $120 billion per year being half of Medicaid spending says a lot (to me) about why making major progress on reducing the fiscal gap in the next decade will undoubtedly require not just at least some tax increases, but mostly tax increases, if we’re going to narrow the gap in an economically wise, maximize-net-benefits kind of way. I mean, can you imagine ever concluding that cutting Medicaid in half would be easier or better than letting less than half of the Bush tax cuts expire?