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Choosing the Nation’s Fiscal Future
sociated with a higher ratio and the additional difficulties of implementing policies that would be consistent with a lower ratio. The committee judged that a debt of 60 percent of GDP reflects an appropriate balance and is an achievable target within a decade—and is therefore useful to guide policy choices that will ultimately be made by elected leaders. This is a different ratio than the committee would have likely proposed under different circumstances. Indeed, it will surely be seen by some as too high and by others as too low. But the committee believes it is the lowest ratio that is practical given the fiscal outlook. A higher debt burden would leave the nation less able to cope with unforeseeable but inevitable shocks—such as international crises or natural disasters—requiring a vigorous federal response. It would put the nation closer to a point from which no politically credible path to sustainability could be constructed. Moreover, stabilizing the debt at a higher ratio implies a higher deficit, a greater draw on the nation’s saving or more foreign borrowing, which will have a negative impact on future living standards. On the other side, a lower ratio would imply even more painful changes in tax and spending policies.
The rapid growth of federal spending for health care is the largest contributor to the nation’s long-term fiscal challenge. Any reasonable path to fiscal sustainability will have to include reforms to reduce the growth rates of Medicare and Medicaid. The challenge posed by Social Security is far less problematic, but still substantial. Options for putting it on a sound fiscal footing range from sizable reductions in currently projected benefit growth to sizable increases in payroll taxes, with many possible intermediate combinations. Spending growth in many other areas of federal activity can be moderated, in part by curtailing or reforming less effective programs. Options that raise taxes substantially include significant reforms to make the tax system fairer and more efficient and include the introduction of new taxes on consumption.
These and other policy changes can be combined to produce a wide range of budget paths or scenarios that would bring revenues and spending into close alignment over the long term and to stabilize the nation’s debt burden. The committee’s different scenarios are intended as an illustrative, but by no means definitive or exhaustive, set of trajectories toward a sustainable fiscal future. The committee offers four representative scenarios that illustrate a wide range of available policy choices. Any of these paths would yield growing debt savings relative to current policies and stabilize the debt at 60 percent of GDP. To achieve this, the budget does not have to be balanced or in surplus. In fact, once the target debt ratio is reached, average deficits could be as high as 2 to 3 percent of GDP without debt growing faster than GDP.
The four illustrative paths show that many policy choices are available if action is taken soon. However, none of them is easy. If the choice is to