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United States Government Accountability Office

The Federal Government’sLong-Term Fiscal Outlook

Fall 2009 Update

GAO

Weaknesses in the economy and financial markets—and the government’sresponse to them—have contributed to near-term increases in federaldeficits, which reached a record level in fiscal year 2009. While a lot of attention has been given to the recent fiscal deterioration, the federalgovernment faces even larger fiscal challenges that will persist long afterthe return of financial stability and economic growth. As shown in figure 1,GAO’s simulations continue to show escalating levels of debt that illustratethat the long-term fiscal outlook remains unsustainable. In little over 10 years, debt held by the public as a percent of GDP under our Alternativesimulation is projected to exceed the historical high reached in theaftermath of World War II and grow at a steady rate thereafter.

GAO’s Long-Term FiscalSimulations

Since 1992, GAO has publishedlong-term fiscal simulations of what might happen to federaldeficits and debt levels under varying policy assumptions. Wedeveloped our long-term model inresponse to a bipartisan requestfrom Members of Congress whowere concerned about the long-term effects of fiscal policy.GAO runs two simulations:

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“Baseline Extended” followsthe Congressional BudgetOffice’s (CBO) Augustbaseline estimates for the first10 years and then simplyholds revenue and spendingother than large entitlement programs constant as a shareof gross domestic product(GDP).

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The “Alternative” simulation isbased on historical trends and policy preferences.Discretionary spending growswith GDP rather than inflationduring the first 10 years,Medicare physician paymentrates are not reduced as inCBO’s baseline, all tax provisions are extended to2019, and beginning with thisupdate, the alternativeminimum tax (AMT)exemption amount is indexedto inflation through 2019;revenues are then broughtback to their historical level.This update incorporates the mostrecent projections from the SocialSecurity and Medicare Trustees,and from CBO.

Figure 1: Debt Held by the Public under Two Fiscal Policy Simulations

Note: Some of the increase in debt has been used to purchase financial assets as part of programs tostabilize financial markets and stimulate the economy. The value of these financial assets has notbeen subtracted from the total debt held by the public in our simulations.

These fiscal challenges are driven by health care cost growth anddemographic trends. Absent reform, Social Security, Medicare, andMedicaid will account for a growing share of the economy in coming years. The longer action to deal with the nation’s long-term fiscal outlookis delayed, the larger the changes will need to be, increasing the likelihoodthat they will be disruptive and destabilizing.

This product responds tocongressional interest in receivingupdated simulation results. Formore information, contact Susan J.Irving at (202) 512-6806 orirvings@gao.gov.

GAO-10-137SP

Health care cost growth and demographic trends that were once thoughtof as long-term challenges are already having a negative impact on thefederal budget in the near term. The oldest members of the baby-boomgeneration are now eligible for Social Security retirement benefits and willbe eligible for Medicare benefits in less than 2 years. Meanwhile,Medicare’s Hospital Insurance (HI) Trust Fund began running cash deficitsin 2008; that is, program expenses exceed dedicated revenue. SocialSecurity cash surpluses, which have been used to help finance othergovernment activities, are projected to turn to cash deficits by 2016 (seefig. 2).

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This will put additional pressure on the rest of the budget.

Health Care Costs andDemographic Trends Are Already Affectingthe Near-Term BudgetOutlook

Figure 2: Social Security and Medicare’s Hospital Insurance Trust Funds CashDeficits based on the Trustees’ 2009 Projections

Note: These projections are based on the Trustees’ intermediate assumptions and are adjusted fromcurrent to constant dollars using the Consumer Price Index.

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The Trustees project that the Social Security trust fund will be exhausted in 2037, 4 yearsearlier than estimated last year. This is largely due to the economic downturn. The datewhen the Medicare HI trust fund is expected to be exhausted was also moved forward by 2 years to 2017. The long-term projections of spending, however, are not materially differentfrom our last update.

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GAO-10-137SP Long-Term Fiscal Outlook Fall 2009

As a result of these trends, annual budget deficits are expected to increasecontinuously under both our Baseline Extended and Alternativesimulations (see fig. 3). In the Baseline Extended, discretionary spendingis lower as a share of the economy and revenues are higher than the 40- year historical average. In the Alternative, both discretionary spending andrevenue as a share of the economy are nearly at the historical averages. Although the timing of deficits and the resulting debt buildup variesdepending on the assumptions used, both simulations show that thefederal government is on an unsustainable fiscal path.

Figure 3: Federal Surpluses and Deficits under Two Fiscal Policy Simulations

While this is similar to the results of previous simulations, the sense of urgency has increased. Beginning in 2009, our Alternative simulationshows persistent annual budget deficits in excess of 7 percent of GDP—levels not seen since the aftermath of World War II.

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GAO-10-137SP Long-Term Fiscal Outlook Fall 2009

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