Current economic policy is becoming unsustainable. Current and projected federal deficits are reaching the point where many economic commentators worry about the long-run viability of current policy.

Current economic policy is becoming unsustainable. Current and projected federal deficits are reaching the point where many economic commentators worry about the long-run viability of current policy.

Here is what we know now.

• At just over 16 percent of Gross Domestic Product (GDP), federal revenue is at its lowest level since 1959.
• The federal government deficit for 2004, including the war supplemental, is expected to be above $500 billion. This is a tremendous drop from a $236 billion surplus in 2000.
• Excluding the social security surplus, the deficit for 2004 is expected to be 6.2 percent of GDP, which would be the largest deficit since the Second World War.
• Over the next 10 years, under current policy, nearly $6 trillion will be added to the federal debt.

And this is the good news. Once we begin to look farther out – beyond the usual 10-year horizon – things look much bleaker. Under current law (see graph below), as projected by the Bush administration, the budget situation is projected to slightly improve until 2013, and then it begins a steep decline as the baby boomer generation starts to retire.

Source: OMB, The Budget for Fiscal Year 2004, Historical Tables; U.S. Department of Treasury

Even this scenario is optimistic. Once you extend expiring tax cuts, reform the alternative minimum tax, reform Medicare, and account for realistic growth in discretionary spending; the next 10 years show only continuing declines (see graph below). In addition, both scenarios assume that there will be no recession or major unforeseen expenses over the next 10 years.

Source: OMB Watch: Beyond the Baseline: 10 Year Deficits Likely to Reach $5.9 Trillion

Much is being made of a strong quarter of growth and the insignificant drop in employment numbers; however, under current policy, we are simply borrowing this mild success from our future – and the bill will come due before too long. Now is the time to address the issue by strengthening the revenue base and fixing the tax system to ensure the financial health of the country.