Currently, federal revenues cover about two-thirds of federal spending. The government borrows money to fill the gap. The more the government borrows, the bigger the national debt, which began rising sharply during George W. Bush's presidency and has accelerated more under President Barack Obama.
Fail to bring spending in line with revenue, and the debt threatens to spiral out of control. Cut spending or raise taxes too fast, and the economy most likely will fall back into recession. Finding the right balance will be a major challenge.
Neither candidate's plan, as currently laid out, would balance the federal budget over the next four years. The plan proposed by Mitt Romney's running mate, Rep. Paul Ryan, R-Wis., would not balance the federal budget until 2038, according to the Congressional Budget Office.
Obama has proposed a budget that would shrink the deficit to 3 percent of gross domestic product — about 60 percent smaller than the current level. That's roughly the expected rate of economic growth, so achieving that would stabilize the debt as a share of the national economy, keeping the government's fiscal problems from getting worse.
Obama's plan would reduce government spending to an average of 22.5 percent of GDP over the next 10 years, down from the current 24 percent.
Romney would cap federal spending at 20 percent of GDP. He would not cut defense spending, so getting to that level would require major reductions in a host of domestic programs, with the biggest single cut hitting Medicaid, the government program that provides medical care for the poor and disabled and covers about 40 percent of the nation's long-term care bills for the elderly.
Even so, his plan would defer the balance to the future, in large part because of new tax cuts it would include. In a recent TV interview he said that the goal of a balanced budget was "eight to 10" years off.
"I'll balance the budget by the end of my second term," he added.
The difference between the candidates' spending plans — 2.5 percent of GDP — may not seem huge, but it amounts to about $6.8 trillion over the decade.
Whether either candidate's plan would ever enable the budget to balance is unclear. Obama administration officials say if they can stabilize the deficit at 3 percent of GDP, the administration and Congress could work on a longer-term plan to bring revenues and expenses into line.
Romney's plan could produce a larger deficit, depending on how he handles the new tax cut he has proposed. He has said he would offset the loss of revenue from his tax cut by eliminating deductions and credits, but he has refused to specify any. If he failed to offset the impact of the tax cut, his plan would swell the deficit by roughly $180 billion to $200 billion a year.
Finding new revenue to offset the tax cuts would be difficult, both mathematically and politically.
Martin Feldstein, a Romney adviser and former chairman of the Council of Economic Advisers in the Reagan administration, wrote recently in The Wall Street Journal that Romney could raise the revenue he needs by eliminating nearly all deductions for taxpayers with gross incomes over $100,000.
Many families with incomes between $100,000 and $200,000 would see taxes go up in that scenario because they would lose deductions for home mortgages and other popular breaks. Many households with incomes above $200,000 would be net winners since their tax cut would outweigh the loss of deductions.
Romney has said he would only eliminate deductions and credits for singles earning more than $200,000 and couples over $250,000 — a much smaller group. Studies cited by the Romney campaign show that would not cover the full cost of his proposed tax cut.
Most recently, Romney has suggested he might support a proposal to set an overall cap on the total amount of deductions a taxpayer could claim. That would raise revenue while avoiding a difficult political fight over each individual deduction.
In any such plan that cuts rates but limits deductions, some taxpayers would see a tax increase while others would get a tax cut.
The Tax Policy Center, a Washington think tank, estimated Romney would have to raise taxes on many families with incomes down to about $75,000 to make his proposed tax cut "revenue neutral." The Romney campaign has disputed those conclusions.Copyright © 2014, Los Angeles Times