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A newly updated report prepared by Ernst & Young (EY) for the Peter G. Peterson Foundation, reexamines the federal government’s long-term fiscal outlook through the “fiscal gap” measure.
The fiscal gap is an estimate of how much the government’s spending and debt obligations exceeds its revenues over a specified period of time. The fiscal gap is calculated by various government agencies — such as the Congressional Budget Office and Government Accountability Office — as a means of quantifying long-term fiscal and debt sustainability. The new report from EY confirms and reinforces these agencies’ findings that a substantial fiscal gap exists and significant changes in fiscal policy will be required to reduce it.
EY calculates the fiscal gap in a variety of ways, including different time horizons and debt levels. Under all of these scenarios, significant policy action is required to close the fiscal gap. For example, EY estimated the policy changes (in 2016 present-value dollars) needed to keep future debt no higher than its current share of GDP (75%):
Bringing debt down to 39% — its historical share of GDP — would require even larger changes in U.S. fiscal policy.
Without action, EY warns that increasing deficits and the resulting debt accumulation could negatively affect the US economy in the following ways:
EDITOR'S NOTE: This post was originally published on June 26, 2016, and updated on November 2, 2016, to reflect the numbers from the updated report. You can access the original report here.
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