Measuring What Matters: Why Italy May Be in Better Fiscal Shape than the US

This study uses fiscal gap accounting (FGA) and generational accounting (GA) to compare US and Italian fiscal solvency. FGA and GA incorporate all government outlays and receipts, whether put on or kept off the books. FGA measures, in the form of reduced net outlays, the constant share of each future year’s GDP needed to balance the government’s intertemporal budget. GA calculates the lifetime net tax rate – lifetime taxes divided by lifetime labor earnings -- facing future generations if current generations pay nothing more, on net, than current policy mandates. Deficit accounting suggests that Italy’s 135 percent debt-to-GDP ratio places it in worse fiscal shape than the US with its 123 percent ratio. But on a fiscal-gap basis, Italy appears in far better shape regardless of the discount rate used. Based on the theoretically appropriate rate – the average real return to national wealth, the U.S. fiscal gap is 7.4%. Italy’s is 4.0%. These requisite solvency adjustments are far larger if delayed or if the UN’s more pessimistic demographic projections prevail. Neither country can expect future generations, on their own, to cover their government’s red ink. Doing so requires levying lifetime net tax rates, in each country, that exceed 100%.