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spending (Medicare, Medicaid, and veterans’ health care) will account for around 6 percent. Other mandatory spending, such as unemployment insurance, disability pay, and the Earned Income Tax Credit, will account for another 2 percent. Military outlays will absorb 4 percent, and interest payments on the publicly held government debt will amount to around 3 percent. I assume that discretionary civilian spending will amount to around 4 percent of GDP, roughly the average of 2005–2008, before the crisis and the stimulus package. In total, therefore, a reasonable baseline for 2015 puts total spending at around 24 percent of GDP.

The single most important point about this accounting is the following: The budget baseline revenue of around 18 percent of GDP will not even cover mandatory spending (13 percent) plus the military (4 percent) plus interest on the debt (3 percent). This means that on the baseline, all civilian discretionary spending, and then some, would have to be paid for with borrowed money.

It might be wondered how Clinton managed to balance the budget, and indeed run a small surplus, at the end of the 1990s. There were four parts to that. First, military spending fell to just 3 percent of GDP, compared with 5 percent today. That saved 2 percentage points of the budget, a good move that should be repeated. Second, revenues soared to around 20 percent of GDP on the back of a hot economy fueled by the temporary dot-com bubble and with top tax marginal rates slightly higher than today. Unfortunately we can count on tax revenues of only around 18 percent of GDP on the basis of the current tax system. Third, interest payments were only 2 percent of GDP in 2000 and will be close to 3 percent in 2015,8 if not more. Fourth, mandatory programs accounted for only 10 percent of GDP and are likely to be around 13 percent by 2015. This sums to a shift of 6 percent of GDP toward deficit, even assuming that defense spending declines to 3 percent of GDP.

We must recall, too, that Clinton and the Republican-led Congress of that period deeply shortchanged key public expenditures—on education, infrastructure, energy, foreign assistance, poverty relief, R&D, and other areas. They squeezed spending below the levels needed to maintain U.S. competitiveness and social well-being in order to keep domestic spending at 15 percent of GDP. With our aging population, rising health care costs, and growing needs in infrastructure, education, energy, and other areas, domestic spending by 2015 will have to be far higher than 15 percent of GDP.

Deficit Cutting Beyond Illusions

Suppose that we want to close that deficit to zero or near zero (with the more precise target discussed below). We need to find budget cuts plus tax increases that sum to around 6 percent of GDP. Most Americans say that they’d like to do this through spending cuts rather than tax increases. Budget cutting certainly sounds more appealing, as long as there is tremendous waste in the budget. The public indeed imagines that the civilian budget is laden with fat. The problem is that the public’s favorite targets for budget cutting are nowhere close enough to do the job. The notion of closing the deficit through budget cuts alone is a fantasy, though a popular one. Considerably higher revenues as a share of GDP will be needed.

Consider two of the politicians’ favorite targets for budget cuts: budget “earmarks” for pet projects within congressional districts (such as the famous “bridge to nowhere”) and foreign aid. Earmarks are on the order of $16 billion per year.9 One percent of GDP is $150 billion per year. Hence earmarks account for 0.1 percent of GDP. Foreign assistance is approximately $30 billion per year, or 0.2 percent of GDP.10 Combining the two categories, their complete elimination—warranted or not—would save just 0.3 percent of GDP, compared with a target of 5 to 6 percent in deficit cuts. So we’re at far less than a tenth of the solution, even with a draconian and unwise total elimination of foreign aid (which the public believes should be a larger fraction of