By the standard debt-to-GDP measure, the US is in somewhat better fiscal shape than Italy: Italy’s ratio is 135%; the US ratio is 123%. But the debt only measures the present value of servicing (i.e. paying interest plus principal on) official IOUs. It excludes the present value of myriad off-the-books obligations, including paying pension and healthcare benefits to today’s and tomorrow’s retirees. Such ‘unofficial’ commitments are no less economically costly or politically imperative.

But the problem with official debt runs far deeper than ignoring particular commitments. Scientifically speaking, it is a measure in search of a concept. The decision to label certain commitments ‘official’ and others ‘unofficial’ is purely linguistic. The equations of economic models do not tell us what language to use to discuss them, nor how to label their variables (e.g. Green and Kotlikoff 2006). Hence, we could just as well say that Social Security benefit commitments are ‘official’ and that promises to service the debt are ‘unofficial’.

In 1989, Berkeley economist Alan Auerbach, Penn-Wharton economist Jagadeesh Gokhale, and I developed two label-free measures of fiscal sustainability (Auerbach et al. 1991). The first is fiscal gap accounting, which measures the constant share of each future year’s GDP needed to balance the government’s intertemporal budget. This requisite annual fiscal adjustment can come via reduced outlays, higher receipts, or a combination.

The second is generational accounting, which calculates the lifetime net tax rate – lifetime taxes divided by lifetime labour earnings – facing future generations if current generations pay nothing more in the form of higher net taxes to reduce the fiscal gap. Fiscal gap accounting and generational accounting incorporate all government outlays and receipts, whether put on or kept off the books.  Critically, these measures produce the same answers for any internally consistent fiscal labelling convention.

Emanuele Dicarlo of the Bank of Italy, Mauro Marè of Luiss University, Marco Olivari of Boston University, and I have spent the past year conducting parallel fiscal gap accounting and generational accounting studies for the US and Italy. Our just-released study (Dicarlo et al. 2025) tells a very different story about the two nations’ fiscal conditions than ‘official’ debt figures convey. The US fiscal gap is 7.4% of annual GDP; Italy’s is 4.0%. In conventional terms, the US needs to run a primary surplus of 5.1% of GDP, not its current -2.3% of GDP. Italy’s primary surplus needs to rise from 1.0% of GDP to 5.0% of GDP.

In practical terms, this requires an immediate and permanent increase in US federal, state, and local taxes of 26.5%. Alternatively, it requires immediately and permanently cutting all non-interest spending by 23.9%. And these figures are optimistic. Delay or unfavourable demographic shifts would require even larger adjustments. Italy’s required tax or spending adjustments are far smaller, at 7.4% and 7.3%, respectively. Unlike the US Social Security system, Italy’s pension system is sustainable thanks to a series of major, painful reforms. And spending on Italy’s state-run healthcare system is neither excessively high nor growing excessively fast.

As for generational accounting, neither country can expect future generations to close their fiscal gaps on their own. Doing so would require levying lifetime net tax rates on both future Americans and Italians that exceed 100%. Yes, the US fiscal gap is a far larger share of future GDP than Italy’s. But, relatively speaking, future Americans will be more numerous and more productive than future Italians. This reflects Italy’s fertility rate of 1.22 and productivity growth rate of 0.6%, which are far below the respective US values of 1.62 and 1.30%.

In short, both the US and Italy are running unsustainable fiscal policies, but the immediate adjustments needed to restore US fiscal solvency are far greater than those required of Italy. Fortunately, there is a saving grace for the US. Radical redesign of many US policies, if enacted immediately, can save the day. For example, adopting Sweden’s healthcare system could lower expected healthcare spending from 18% of GDP to 11% and achieve dramatically better – 5th best, not 30th best – healthcare outcomes.

Fiscally responsible countries take these label-free, long-term fiscal budgeting measures seriously. Take the EU: it does fiscal gap accounting for all 27 member countries as part of its triennial Fiscal Sustainability Report. Or consider Norway’s $2 trillion state pension fund: its origins lie in an early Norwegian fiscal gap accounting/ generational accounting study showing that, notwithstanding reporting a massive fiscal surplus (negative debt), the country was endangering future generations by overspending oil revenues from its finite North Sea reserves.

It is time to face facts. The US is insolvent. Congress must mandate the Congressional Budget Office to do fiscal gap accounting and generational accounting on a routine basis and immediately adjust policy to eliminate the country’s massive fiscal gap.

References

Auerbach, A J, J Gokhale, and L J Kotlikoff (1991), “Generational accounts: A meaningful alternative to deficit accounting”, Tax Policy and the Economy 5: 55–110.

Dicarlo, E, L J Kotlikoff, M Marè and M Olivari (2025), “Measuring what matters: Why Italy may be in better shape than the US”, NBER Working Paper No. 34340.

Green, J and L J Kotlikoff (2006), “On the General Relativity of Fiscal Language”, NBER Working Paper No. 12344.