The Budget Debate
The Congressional Budget Office provides an analysis of the long-term Budget outlook.
The projections also assume for analytical purposes that aggregate federal revenues will level out at 19 percent of GDP in 2020, reflecting the higher end of the range over which they have fluctuated during the post-World War II period (18 percent was the average from 1950 through 2001).
Essentially, what this exercise shows is that it will be impossible to maintain revenue at 19 percent of GDP and pay for future entitlement programs. Either revenues must be higher, or entitlement spending must be cut.
As the baby boomers retire, spending on Social Security benefits and Medicare will steadily rise, as will spending on Medicaid (because of rising medical costs). Eventually, unless there are sharp cuts in benefits, these three programs alone will consume a larger share of G.D.P. than the federal government currently collects in taxes.
For Discussion. Krugman says that “to close the fiscal gap, spending on these programs would have to be cut by around 40 percent…this sounds politically impossible…Yet closing the fiscal gap by raising taxes would mean rolling back all of the Bush tax cuts, and then some. And that also sounds politically impossible.” Should the American people be asked to choose explicitly between a gradual increase in the retirement age and an increase in taxes? Should the trade-offs be spelled out and then put to a vote?