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Winter/Spring 2010 Vol. 10 Number 1

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Tackling the National Debt

Report Offers Several Paths to Fiscal Stability

The publicly held U.S. national debt has reached the unprecedented level of over $7.5 trillion, and the sum continues to escalate. Right now the nation's level of debt is equivalent to about 55 percent of its Gross Domestic Product (GDP), the value of domestic goods and services plus the country's available capital.

If federal spending grows as projected under current policies and new taxes aren't added, by 2020 the debt will rise to nearly 80 percent of GDP, according to estimates from the Congressional Budget Office. What's behind this rapid growth? While the reasons are complex, a primary one is that an aging population and rising health care costs are driving up federal spending on the nation's big entitlement programs -- Social Security, Medicare, and Medicaid -- and tax levels are not keeping pace.

As the debt climbs, so too do the nation's interest payments, which will increasingly eat into funds available for government services, such as education, defense, and transportation. And the effects may not arrive gradually, warns a new joint report from the National Research Council and National Academy of Public Administration. If the nation's creditors lose trust that the U.S. has a plan repay its debts, they may suddenly raise interest rates, forcing the government into a rushed, ill-considered response that could hobble our economy for years and deprive citizens of needed services.

To lower the risk of a crisis, the government needs to take aggressive steps to restrain the growth of the debt starting in 2012, as soon as recovery from the current economic circumstances strengthens. U.S. leaders should set a target of stabilizing the ratio of the nation's debt to its GDP at a sustainable level by 2022. Holding the debt to 60 percent of the GDP is an achievable target within a decade, the report says; any higher ratio would create an unacceptable risk of higher interest rates and a financial crisis.

There are many paths the nation could take to hold its debt to a sustainable level, says the report, which lays out four scenarios to illustrate how it could be done. One is a "low-spending, low-taxes" approach that would keep taxes roughly unchanged but require defense and domestic spending cuts of 20 percent. At the opposite end of the spectrum is a path that would require substantially higher taxes but which would keep up with projected growth in payout of Social Security benefits and would allow spending levels for other programs to be higher than they are now. Also included are two paths that fall between these extremes, requiring combinations of spending cuts and tax increases that reflect different priorities.

The pathways are only four of many the government could take to restrain the debt, the report stresses; whether the solution leans in the direction of higher taxes or lower spending depends on citizens' and policymakers' views of the proper size and role of government. The important thing is that action be taken soon. Delaying by even five or 10 years will make fixing the nation's fiscal problems far more painful, requiring even higher taxes or lower levels of government services, said the committee that wrote the report.

"We know it will be hard for people and their representatives to come to agreement on the kinds of changes needed, given the obvious divisions among people in priorities and views of government," said committee co-chair Rudolph Penner, a fellow at the Urban Institute, Washington, D.C. "But everyone will benefit in the long term if we accept some short-term pain." — Sara Frueh

Choosing the Nation's Fiscal Future. Committee on the Fiscal Future of the United States, National Research Council and National Academy of Public Administration (2010, 268 pp.; ISBN 0-309-14723-9; available from the National Academies Press, tel. 1-800-624-6242; $53.95 plus $5.00 shipping for single copies).

The committee was co-chaired by John Palmer, distinguished university professor and dean emeritus, Maxwell School, Syracuse University, Syracuse, N.Y.; and Rudolph Penner, Institute Fellow, Urban Institute, Washington, D.C. The study was funded by the John D. and Catherine T. MacArthur Foundation.

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Copyright 2010 by the National Academy of Sciences