Worth: Mankiw Economics 5e CHAPTER I5 Government Debt 409 While the 10-year horizon looked rosy, the longer-term fiscal picture was more roublesome. The problem was demographic. Advances in medical technology have been increasing life expectancy, while improvements in birth-control techniques and changing social norms have reduced the number of children people have. Be- cause of these developments, the elderly are becoming a larger share of the popula- tion. In 1990, there were 21 elderly for every 100 people of working age(ages 20 to 64); this figure is projected to rise to 36 by the year 2030. Such a demographic change has profound implications for fiscal policy. About one-third of the budget of the U.S. federal government is devoted to pensions and health care for the el- derly. As more people become eligible for these "entitlements, as they are some- times called, government spending automatically rises over time, pushing the budget toward deficit. The magnitude of these budgetary pressures was documented in a CBO re- port released in October 2000. According to the CBO, if no changes in fiscal policy are enacted, the government debt as a percentage of gDP will start rising around 2030 and reach historic highs around 2060. At that point, the govern- ment's budget will spiral out of control Of course, all economic forecasts need to be greeted with a bit of skepticism especially those that try to look ahead half a century. Shocks to the economy can alter the government's revenue and spending. In fact, only months after moving into the White House, George W. Bush saw the fiscal picture start to change First the economic slowdown in 2001 reduced tax revenue. Then. the terrorist attacks in September 2001 induced an increase in government spending. Both developments reduced the projected near-term government surpluses. As this book was going to press, there was great uncertainty about future government spending and the rate of technological advance--two key determinants of the fiscal situation Yet one thing is clear: the elderly are making up a larger share of the popula tion, and this fact will shape the fiscal challenges in the decades ahead. 75-2 Problems in Measurement The government budget deficit equals government spending minus government revenue, which in turn equals the amount of new debt the government needs to issue to finance its operations. This definition may sound simple enough, but in fact debates over fiscal policy sometimes arise over how the budget deficit should be measured. Some economists believe that the deficit as currently measured is not a good indicator of the stance of fiscal policy. That is, they believe that the budget deficit does not accurately gauge either the impact of fiscal policy on todays economy or the burden being placed on future generations of taxpayers. In this section we discuss four problems with the usual measure of the budget deficit. I Congressional Budget Office, The Long- Tem Budget Outlook, October 2000 User LUKBI: Job EFFo1431: 6264_ch15: Pg 409: 28039#/eps at 100s Wed,Feb20,20023:28User LUKBI:Job EFF01431:6264_ch15:Pg 409:28039#/eps at 100% *28039* Wed, Feb 20, 2002 3:28 PM 15-2 Problems in Measurement The government budget deficit equals government spending minus government revenue, which in turn equals the amount of new debt the government needs to issue to finance its operations.This definition may sound simple enough, but in fact debates over fiscal policy sometimes arise over how the budget deficit should be measured. Some economists believe that the deficit as currently measured is not a good indicator of the stance of fiscal policy.That is, they believe that the budget deficit does not accurately gauge either the impact of fiscal policy on today’s economy or the burden being placed on future generations of taxpayers.In this section we discuss four problems with the usual measure of the budget deficit. CHAPTER 15 Government Debt | 409 While the 10-year horizon looked rosy, the longer-term fiscal picture was more troublesome.The problem was demographic.Advances in medical technology have been increasing life expectancy, while improvements in birth-control techniques and changing social norms have reduced the number of children people have. Be￾cause of these developments,the elderly are becoming a larger share of the popula￾tion. In 1990, there were 21 elderly for every 100 people of working age (ages 20 to 64); this figure is projected to rise to 36 by the year 2030. Such a demographic change has profound implications for fiscal policy.About one-third of the budget of the U.S. federal government is devoted to pensions and health care for the el￾derly.As more people become eligible for these “entitlements,” as they are some￾times called, government spending automatically rises over time, pushing the budget toward deficit. The magnitude of these budgetary pressures was documented in a CBO re￾port released in October 2000. According to the CBO, if no changes in fiscal policy are enacted, the government debt as a percentage of GDP will start rising around 2030 and reach historic highs around 2060. At that point, the govern￾ment’s budget will spiral out of control.1 Of course, all economic forecasts need to be greeted with a bit of skepticism, especially those that try to look ahead half a century. Shocks to the economy can alter the government’s revenue and spending. In fact, only months after moving into the White House, George W. Bush saw the fiscal picture start to change. First, the economic slowdown in 2001 reduced tax revenue.Then, the terrorist attacks in September 2001 induced an increase in government spending. Both developments reduced the projected near-term government surpluses. As this book was going to press, there was great uncertainty about future government spending and the rate of technological advance—two key determinants of the fiscal situation. Yet one thing is clear: the elderly are making up a larger share of the popula￾tion, and this fact will shape the fiscal challenges in the decades ahead. 1 Congressional Budget Office, The Long-Term Budget Outlook, October 2000