(Finance) – The United States “must ensure that the federal government’s fiscal policy is on a sustainable path. Over the past decade, the federal fiscal outlook has worsened due to significantly higher interest rates and multiple rounds of tax cuts for the wealthiest Americans. Nondefense discretionary spending as a share of GDP remains historically low, but government revenues as a share of the economy are significantly lower than expected before the previous administration’s tax cuts.” Janet Yellenduring an event of the New York Association for Business Economics.
“As a result, the 2024 fiscal deficit as a percentage of GDP, at 6.4 percent, is historically high in an economy operating at near full employment,” he explained. “And in the decades ahead, increased non-discretionary spending for our elderly population is set to put further upward pressure on the deficit. The fiscal path envisaged by current budget policies is simply not sustainable and the consequences of inaction or action that exacerbates projected deficits could be disastrous“.
According to Yellen, “the government must give more weight to concerns about fiscal sustainability when determining fiscal and spending priorities. Long-term interest rates are not under government control, but the current environment of higher interest rates requires lower primary budget deficits than in the past to ensure fiscal sustainability. This does not mean that critical supply-side investments should be reduced: Given their significant returns, these investments pose little threat to long-term fiscal sustainability. Rather, they are necessary to keep our country on a favorable growth path.”
“And no country can claim to be serious about fiscal sustainability if it does not invest in a functioning tax collection agency,” he added. “To achieve fiscal sustainability, the government will have to raise additional revenue. The simplest way to raise revenue is provide the Internal Revenue Service with the resources necessary to enforce applicable tax law. The tax gap, or the amount by which actual tax collections fall short of what is owed, is currently estimated to be more than $7 trillion over the next decade. Adequate funding for the IRS can reduce that gap by ensuring that the wealthiest individuals, large corporations, and complex partnerships pay the taxes they owe under current tax law.”