Italy May Be in Better Fiscal Shape Than the United States

Why Official Debt Statistics Conceal More Than They Reveal

A new NBER working paper by Emanuele Dicarlo, Laurence Kotlikoff, Mauro Marè, and Marco Olivari challenges the conventional picture of fiscal health. On the surface, Italy appears deeply indebted, with gross public debt around 135 percent of GDP, far above the United States’ 123 percent ratio. Yet when the authors measure fiscal solvency using economically grounded methods rather than official deficit accounting, the conclusion reverses. Italy’s fiscal position is meaningfully stronger than America’s.

Thanks for reading The Unseen and The Unsaid! Subscribe for free to receive new posts and support my work.

Beyond Official Deficits

The study argues that traditional deficit and debt statistics are conceptually meaningless because they depend on arbitrary government accounting conventions. Policymakers can decide which obligations to label “official” and which to keep off the books, without altering the underlying economic reality. This “labeling problem,” long emphasized by Kotlikoff, means that the official deficit is not a coherent economic concept—it tells us nothing about whether a nation is living within its intertemporal budget constraint.

To overcome this, the authors employ fiscal gap accounting (FGA) and generational accounting (GA) frameworks that incorporate all projected government outlays and receipts, discounted to present value. FGA measures how much policy must immediately and permanently adjust, as a share of GDP, to make the government solvent over time. GA estimates the lifetime net tax burden facing future generations if current generations pay no more than current policy requires.

The Role of the Discount Rate

A key feature of this analysis is the choice of discount rates. This is the interest rate used to translate future promises into present value. In economic terms, it measures the price of time: how much less future payments are worth today. Governments often discount future spending at their own borrowing rate, the yield on government bonds, because it looks low and safe. But this is the wrong yardstick for fiscal solvency.

The relevant rate is the average real return on national wealth—what the country’s private capital earns, net of inflation. That return represents society’s actual opportunity cost of diverting resources from investment toward current consumption. Using the government’s bond rate understates the true burden of future obligations; it is like valuing future promises using a cheaper clock.

Measuring Solvency Properly

Using official demographic and fiscal projections for both countries, the authors find that the U.S. fiscal gap is roughly 7.4 percent of annual GDP when discounted at the average real return to national wealth, the economically appropriate discount rate. For Italy, the corresponding figure is 4.0 percent of GDP.

Put differently, the United States would need an immediate and permanent 26.5 percent increase in total tax revenues or a 23.9 percent reduction in primary spending to restore fiscal balance. Italy would need only about 7.3 percent on either side of the ledger.

Fiscal Adjustment Needed to Achieve Long-Term Solvency

Permanent change in total revenues or non-interest spending required to close the fiscal gap.

At a lower, 2 percent discount rate, close to government borrowing costs, Italy’s fiscal gap nearly vanishes (0.7 percent of GDP), while America’s remains substantial (4.25 percent). The finding is robust to alternative demographic assumptions, including those from the UN, and to small changes in productivity growth.

Generational Implications

Generational accounting reinforces the message. If today’s adults contribute nothing more than current law requires, future Americans would face a lifetime net tax rate exceeding 100 percent of their lifetime labor income—an impossibility. Italy’s projected rate is similarly unsustainable, though for different reasons: its shrinking and aging labor force cannot generate enough future income to finance even a smaller fiscal gap. In both countries, deferring adjustment to future generations is economically and morally untenable.

The timing of reform matters as much as its size. Waiting until 2050 roughly doubles Italy’s required adjustment and triples America’s. Because the relevant discount rate is the real return on national wealth, not the artificially low risk-free rate, each year of delay compounds the burden at a high effective cost.

Even deep cuts to discretionary spending would not restore solvency. A permanent 20 percent reduction in non-entitlement outlays would lower the fiscal gap to 5.7 percent in the U.S. and 2.5 percent in Italy, still far from balance. The core of the problem lies in entitlement trajectories and implicit transfer promises, not in annual discretionary budgets.

A Broader Lesson

The broader lesson is that official debt and deficit figures are political constructs, not economic ones. Fiscal sustainability depends on whether a country’s total commitments, both explicit and implicit, are consistent with its long-term productive capacity, discounted at the true intertemporal price of capital. By that measure, the United States’ fiscal imbalance is substantially larger and more urgent than Italy’s.

Both nations face daunting demographic headwinds. But Italy’s long series of pension reforms and automatic stabilizers have limited its off-book liabilities. The U.S., by contrast, continues to accumulate implicit promises, especially in Social Security and Medicare, while maintaining the illusion of safety by focusing on the wrong metric.

Italy’s experience demonstrates that high reported debt is not synonymous with fiscal insolvency, and that America’s apparently more moderate debt ratio conceals an unsustainable long-term imbalance. The appropriate benchmark for solvency is not the bond market’s rate of return but the economy’s real opportunity cost of capital. When judged by that standard, the United States is living further beyond its means than nearly any advanced economy, and postponing adjustment merely ensures that the eventual correction will be far more severe.

Thanks for reading The Unseen and The Unsaid! Subscribe for free to receive new posts and support my work.

For more information or to meet with the scholar, contact Mercatus at media@mercatus.org.