Fiscal gap

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The fiscal gap is a measure of a government's total indebtedness proposed by economists Laurence Kotlikoff and Alan Auerbach, who define it as the difference between the present value of all of government's projected financial obligations, including future expenditures, including servicing outstanding official federal debt, and the present value of all projected future tax and other receipts, including income accruing from the government's current ownership of financial assets.^[1] According to Kotlikoff and Auerbach, the "fiscal gap" accounting method can be used to calculate the percentage of necessary tax increases or spending reductions needed to close the fiscal gap in the long-run.

Generational accounting, an accounting method closely related to the fiscal gap, has been proposed by the same authors as a measure of the future burden of closing the fiscal gap. The "generational accounting" assumes that current taxpayers are neither asked to pay more in taxes nor receive less in transfer payments than current policy suggests and that successive younger generations' lifetime tax payments net of transfer payments received rise in proportion to their labor earnings.

According to Kotlikoff and Auerbach, "fiscal gap accounting" and "generational accounting" reports have been done for roughly 40 developed and developing countries either by their treasury departments, finance ministries, or central banks, or by the IMF, the World Bank, or other international agencies, or by academics and think tanks.