Achieving Long-Run Fiscal Sustainability

Apr. 8, 2013
William Emmons

Presentation (pdf)

William Emmons, St. Louis Fed assistant vice president and economist, discussed whether the United States can achieve long-run fiscal sustainability in this “Dialogue with the Fed” held April 8, 2013. Following the presentation, Kevin Kliesen, research officer and business economist, offered his views on the topic. He and Emmons then took questions from the audience in a session moderated by Julie Stackhouse, senior vice president of Banking Supervision, Credit, Community Development and Learning Innovation.

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Emmons explored the continual growth of federal non-defense spending in conjunction with the government’s flat revenue-to-GDP ratio, which has fluctuated between roughly 15 percent and 20 percent since 1945. He explained that the cost drivers of Social Security, Medicare and other federal programs are very difficult to affect because the population is aging, health care costs are rising faster than GDP and other factors. Non-defense spending will continue to rise under current circumstances, Emmons said, while the share of taxes collected relative to GDP can’t go up under the current tax system. Using Congressional Budget Office projections scenarios, Emmons demonstrated that the budget deficit could reach 20 percent of GDP in several decades. Under those projections, he said, the accumulated federal debt held by the public will also grow very large and become unsustainable.

The U.S. has avoided such a fiscal crisis over the past 60-70 years because of declining defense spending and the youth of the Baby Boomers. But those solutions are no longer available, he said. Ultimately, Emmons explained, whether the United States can achieve long-run fiscal sustainability and avoid fiscal disaster depends on the willingness of both of the political factions and the general public to make changes and shared sacrifices.

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