unsustainable on a number of occasions during that long period, the fact that the British government never defaulted meant that the budget was sustainable (Wyplosz, 2007).

Whatever debt-to-GDP ratio is chosen as a target for stabilization it must be low enough to inspire confidence by the investors who buy a nation’s debt. The target for stabilization chosen in this study, a debt-to-GDP ratio of 60 percent, is chosen both for its near-term feasibility and to minimize the risk of increasing debt in the future. The forward-looking part of the target relates to the second part of the definition of sustainability used here, that revenues and spending must remain closely aligned over a long horizon.

The arithmetic of stabilizing the ratio is straightforward. The debt cannot grow faster over any long period than does the economy. Arithmetically, the primary deficit—which is the difference between revenues and spending (other than for interest on the debt)—should be zero if the average interest rate on the debt equals the growth rate of the economy. If the annual interest payment on the debt is 5 percent of GDP and the deficit equals the interest payment, the debt will grow 5 percent annually. If the economy is also growing at a rate of 5 percent, the debt-to-GDP ratio will remain constant. If the interest payment on the debt as a percentage of GDP exceeds the growth rate of the economy, then a primary budget surplus is necessary to stabilize the debt. If the interest payment is less than the rate of growth of the economy, then a primary budget deficit may be consistent with fiscal sustainability (von Furstenberg, 1991).

FISCAL GAP

The Congressional Budget Office (CBO) and others have calculated a “fiscal gap” measure of the extent to which a long-term budget outlook departs from sustainability (with sustainability defined as a long-term balance between expected revenues and expected spending) (Auerbach, 1994; Congressional Budget Office, 2009). This measure is constructed from projections of annual revenues and spending. The federal government’s expected long-term flows of revenues and spending are represented by a single number, which is the present value of future payments to and from the Treasury Department, discounted by the time value of money to make them comparable with payments today.

The fiscal gap is therefore a present-value measure of the nation’s fiscal imbalance. That imbalance reflects shortfalls of revenues relative to spending estimated over a given period. The fiscal gap can be said to represent the extent to which the government would need to immediately and permanently raise tax revenues, cut spending, or use some mix of both to make



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