U.S. Fiscal Imbalance over Time: This Time Is Different

By Jeffrey Miron

The U.S. fiscal imbalance—the excess of what we expect to spend, including repayment of our debt, over what government expects to receive in revenue—is large and growing. And with politicians proposing large new expenditures, little is being done to rectify the country’s fiscal health. Although some policymakers argue that fiscal meltdowns have never happened in U.S. history and that therefore “this time is no different,” the reality is that the nation’s fiscal situation has been deteriorating since the mid‐1960s, is far worse than ever before, and could lead to a fiscal crisis if no major spending adjustments occur in the next few decades.

To demonstrate this argument, this paper projects fiscal imbalance as of every year between 1965 and 2014, using data‐supported assumptions about gross domestic product (GDP) growth, revenue, and trends in mandatory spending on Social Security, Medicare, Medicaid, and other programs. The projections reveal that the United States has faced a growing fiscal imbalance since the early 1970s, largely as a consequence of continuous growth in mandatory spending. As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).

In December 2015, we released a White Paper which serves as an introduction to the fiscal imbalance issue. Fiscal Imbalance: A Primer details the key principles necessary for understanding the true state of government financial health.