The purpose of this paper is to address a significant fiscal policy issue concerning the long-term sustainability of U.S. budget deficits. Traditional theory would hold that deficits can be sustained in the long run if the public debt-to-GDP ratio is not increasing, and that it is not necessary to have a budget surplus in order to have a declining public debt-to-GDP ratio. Moreover, fiscal policy is sustainable even if there is a budget deficit as long as GDP growth rate is at least equal to the growth rate of public debt. In contrast, we propose that the public debt-to-revenue and revenue-to-GDP ratios are equally crucial when developing debt management policies and strategies for achieving successful economic outcomes. This paper focuses on the U.S. case since historically it has less capability (because of political gridlock) to achieve sizeable increases in revenues when compared to the Euro-zone countries.
Budget deficits, public debt, debt-to-GDP ratio, debt-to-revenue ratio