Discuss Question 7
7. FISCAL WISDOM: Effectively addressing our structural federal deficits will require both reductions in future projected spending AND increased revenues (compared to the historical average) as a percent of the economy.
ANSWER: True – A combination of both spending reductions and revenue increases above the historical average will be required to effectively address our structural deficits. Increasing revenues alone is unrealistic. The recent historical average of federal revenue collected as a percentage of the economy is about 18.4%. In order to increase revenue enough to account for projected increases in spending, taxes would have to rise to levels that would be unattainable both politically and economically. For example, according to the Congressional Budget Office federal spending is projected to be about 37% of the economy in 2040. Meeting that level of spending solely through tax increases would require doubling the amount of federal revenue as a percentage of the economy, compared to historical averages. On the other hand, to achieve fiscal balance through reducing spending alone would require cuts to government programs that are politically unrealistic. For example, if only spending cuts are used to balance the budget, and revenues were kept at their historical level of 18.4%, according the Congressional Budget Office by 2024 there would only be enough revenue to pay for Social Security, mandatory federal health programs (e.g. Medicare and Medicaid) and interest on the debt. All other spending would have to be eliminated, which includes such programs as Defense, Foreign Policy, Justice, Transportation, Education, and Homeland Security.