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United States Government Accountability Office: 

DOD Budget And Transformation: Challenges And Opportunities: 

The Honorable David M. Walker: 
Comptroller General of the United Sums: 

House Armed Services Committee: 
Briefing: 
January 24, 2007: 

Composition of Federal Spending: 

[See PDF for image] - graphic text 

3 pie charts with 5 items each. 

1966: 
Defense: 43.0%; 
Social Security: 15.0%; 
Medicare & Medicaid: 1.0%; 
Net interest: 7.0%; 
All other spending: 34.0%. 

1986: 
Defense: 28.0%; 
Social Security: 20.0%; 
Medicare & Medicaid: 10.0%; 
Net interest: 14.0%; 
All other spending: 29.0%. 

2006[A]: 
Defense: 20.0%; 
Social Security: 21.0%; 
Medicare & Medicaid: 19.0%; 
Net interest: 9.0%; 
All other spending: 32.0%. 

Sources: Office of Management and Budget and the Department of the 
Treasury. 

Note: Numbers may not add to 100 percent due to rounding. 

[A]Preliminary. 

[End of Figure] 

Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] - graphic text 

3 pie charts with 3 items each. 

1965: 
Discretionary: 66%; 
Mandatory: 27%; 
Net Interest: 7%. 

1985: 
Discretionary: 44%; 
Mandatory: 42%; 
Net Interest: 14%. 

2005: 
Discretionary: 39%; 
Mandatory: 54%; 
Net Interest: 7%. 

Source: Office of Management and Budget. 

[End of figure] 

Surplus or Deficit as a Share of GDP Fiscal Years 1962-2006: 

[See PDF for image] - graphic text: 
	
Line/Stacked Bar combo chart with 1 line (Unified) and 43 bars. 
	
Fiscal year: 1962; 
On-budget: -1%; 
Off-budget: -0.2%; 
Unified: -1.3%. 

Fiscal year: 1963; 
On-budget: -0.7%; 
Off-budget: -0.1%; 
Unified: -0.8%. 

Fiscal year: 1964; 
On-budget: -1%; 
Off-budget: 0.1%; 
Unified: -0.9%. 

Fiscal year: 1965; 
On-budget: -0.2%; 
Off-budget: No data; 
Unified: -0.2%. 

Fiscal year: 1966; 
On-budget: -0.4%; 
Off-budget: -0.1%; 
Unified: -0.5%. 

Fiscal year: 1967; 
On-budget: -1.6%; 
Off-budget: 0.5%; 
Unified: -1.1%. 

Fiscal year: 1968; 
On-budget: -3.2%; 
Off-budget: 0.3%; 
Unified: -2.9%. 

Fiscal year: 1969; 
On-budget: -0.1%; 
Off-budget: 0.4%; 
Unified: 0.3%. 

Fiscal year: 1970; 
On-budget: -0.9%; 
Off-budget: 0.6%; 
Unified: -0.3%. 

Fiscal year: 1971; 
On-budget: -2.4%; 
Off-budget: 0.3%; 
Unified: -2.1%. 

Fiscal year: 1972; 
On-budget: -2.2%; 
Off-budget: 0.3%; 
Unified: -2%. 

Fiscal year: 1973; 
On-budget: -1.2%; 
Off-budget: No data; 
Unified: -1.1%. 

Fiscal year: 1974; 
On-budget: -0.6%; 
Off-budget: 0.1%; 
Unified: -0.4%. 

Fiscal year: 1975; 
On-budget: -3.5%; 
Off-budget: 0.1%; 
Unified: -3.4%. 

Fiscal year: 1976; 
On-budget: -4.1%; 
Off-budget: -0.2%; 
Unified: -4.2%. 

Fiscal year: 1977; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1978; 
On-budget: -2.5%; 
Off-budget: -0.2%; 
Unified: -2.7%. 

Fiscal year: 1979; 
On-budget: -1.5%; 
Off-budget: -0.1%; 
Unified: -1.6%. 

Fiscal year: 1980; 
On-budget: -2.7%; 
Off-budget: No data; 
Unified: -2.7%. 

Fiscal year: 1981; 
On-budget: -2.4%; 
Off-budget: -0.2%; 
Unified: -2.6%. 

Fiscal year: 1982; 
On-budget: -3.7%; 
Off-budget: -0.2%; 
Unified: -4%. 

Fiscal year: 1983; 
On-budget: -6%; 
Off-budget: No data; 
Unified: -6%. 

Fiscal year: 1984; 
On-budget: -4.8%; 
Off-budget: No data; 
Unified: -4.8%. 

Fiscal year: 1985; 
On-budget: -5.3%; 
Off-budget: 0.2%; 
Unified: -5.1%. 

Fiscal year: 1986; 
On-budget: -5.4%; 
Off-budget: 0.4%; 
Unified: -5%. 

Fiscal year: 1987; 
On-budget: -3.6%; 
Off-budget: 0.4%; 
Unified: -3.2%. 

Fiscal year: 1988; 
On-budget: -3.9%; 
Off-budget: 0.8%; 
Unified: -3.1%. 

Fiscal year: 1989; 
On-budget: -3.8%; 
Off-budget: 1%; 
Unified: -2.8%. 

Fiscal year: 1990; 
On-budget: -4.8%; 
Off-budget: 1%; 
Unified: -3.9%. 

Fiscal year: 1991; 
On-budget: -5.4%; 
Off-budget: 0.9%; 
Unified: -4.5%. 

Fiscal year: 1992; 
On-budget: -5.5%; 
Off-budget: 0.8%; 
Unified: -4.7%. 

Fiscal year: 1993; 
On-budget: -4.6%; 
Off-budget: 0.7%; 
Unified: -3.9%. 

Fiscal year: 1994; 
On-budget: -3.7%; 
Off-budget: 0.8%; 
Unified: -2.9%. 

Fiscal year: 1995; 
On-budget: -3.1%; 
Off-budget: 0.9%; 
Unified: -2.2%. 

Fiscal year: 1996; 
On-budget: -2.3%; 
Off-budget: 0.9%; 
Unified: -1.4%. 

Fiscal year: 1997; 
On-budget: -1.3%; 
Off-budget: 1%; 
Unified: -0.3%. 

Fiscal year: 1998; 
On-budget: -0.3%; 
Off-budget: 1.1%; 
Unified: 0.8%. 

Fiscal year: 1999; 
On-budget: No data; 
Off-budget: 1.4%; 
Unified: 1.4%. 

Fiscal year: 2000; 
On-budget: 0.9%; 
Off-budget: 1.5%; 
Unified: 2.4%. 

Fiscal year: 2001; 
On-budget: -0.3%; 
Off-budget: 1.6%; 
Unified: 1.3%. 

Fiscal year: 2002; 
On-budget: -3.1%; 
Off-budget: 1.5%; 
Unified: -1.5%. 

Fiscal year: 2003; 
On-budget: -4.9%; 
Off-budget: 1.5%; 
Unified: -3.5%. 

Fiscal year: 2004; 
On-budget: -4.9%; 
Off-budget: 1.3%; 
Unified: -3.6%. 

Fiscal year: 2005; 
On-budget: -4%; 
Off-budget: 1.4%; 
Unified: -2.6%. 

Fiscal year: 2006; 
On-Budget: -3.3; 
Off-budget: 1.4; 
Unified: -1.9.

Sources: Office of Management and Budget, Department of the Treasury 
and the Congressional Budget Office. 

[End of figure] 

Fiscal Year 2005 and 2006 Deficits and Net Operating Costs: 

Dollars in billions. 
	
On-Budget Deficit; 
Fiscal Year 2005: ($494); 
Fiscal Year 2006: ($434). 

Unified Deficit; 
Fiscal Year 2005: ($318); 
Fiscal Year 2006: ($248). 

Net Operating Cost; 
Fiscal Year 2005: ($760); 
Fiscal Year 2006: ($450).  

Sources: The Office of Management and Budget and the Department of the 
Treasury. 

Notes: Fiscal year 2005 and 2006 net operating cost figures reflect 
significant but opposite changes in certain actuarial costs. For 
example, changes in interest rates and other assumptions used to 
estimate future veterans' compensation benefits increased net operating 
cost by $228 billion in 2005 and reduced net operating cost by $167 
billion in 2006. 

[End of table] 

Major Reported Long-Term Fiscal Exposures: 

Explicit liabilities (Publicly held debt, military & civilian pensions 
& retiree health, other); 	
2000: $6.9; 
2006: $10.4; 
Percent Increase: 52%. 

Commitments & Contingencies: e.g., PBGC, undelivered orders; 
2000: $0.5; 
2006: $1.3; 
Percent Increase: 140%. 

Implicit exposures; 
2000: $13.0; 
2006: $38.8; 
Percent Increase: 197%.

Implicit exposures: Future Social Security benefits; 
2000: $3.8; 
2006: $6.4; 
Percent Increase: [Empty]. 

Implicit exposures: Future Medicare Part A benefits; 
2000: $2.7; 
2006: $11.3; 
Percent Increase: [Empty]. 

Implicit exposures: Medicare Part B benefits; 
2000: $6.5; 
2006: $13.1; 
Percent Increase: [Empty]. 

Implicit exposures: Medicare Part D benefits; 
2006: $7.9; 
Percent Increase: [Empty]. 

Total; 
2000: $20.4; 
2006: $50.5; 
Percent Increase: 147%.

Source: 2000 and 2006 Financial Report of the United States Government. 

Note: Estimates for Social Security and Medicare are at present value 
as of January 1 of each year and all other data are as of September 30. 
Totals may not add due to rounding. Percentage increases are based on 
actual data and may differ from increases calculated from rounded data 
shown in table. 

[End of table] 

[End of figure] 

Understanding the Size of Major Reported Fiscal Exposures: 

Our fiscal burden can be translated and compared as follows: 

Major reported fiscal exposures: 
2006: $50.5 trillion; 
Total household net worth: 
2006: $53.3 trillion: 
* Ratio of fiscal exposures to net worth: 95 percent. 

Burden: 
Per person: $170,000; 
Per full-time worker: $400,000; 
Per household: $440,000. 

Income: 
Median household income: $46,326; 
Disposable personal income per capita: $31,519. 

Ratio of household burden to median income: 9.5. 

Sources: GAO analysis of data from the Department of the Treasury, 
Federal Reserve Board, U.S. Census Bureau and Bureau of Economic 
Analysis: 

[End of table] 

Unified Surpluses and Deficits as a Share of GDP Under Alternative 
Fiscal Policy Simulations: 

[See PDF for Image] - graphic text: 

Line graph with 2 different lines, one for baseline extended and the 
other for Discretionary spending grows with the economy and all 
expiring tax provisions extended. 

Year: 2000; 
Baseline extended: 2.43; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: 2.43. 

Year: 2001; 
Baseline extended: 1.27; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: 1.27. 

Year: 2002; 
Baseline extended: -1.52; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -1.52. 

Year: 2003; 
Baseline extended: -3.49; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.49. 

Year: 2004; 
Baseline extended: -3.58; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.58. 

Year: 2005; 
Baseline extended: -2.59; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -2.59. 

Year: 2006; 
Baseline extended: -2.58; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -2.66. 

Year: 2007; 
Baseline extended: -1.96; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -2.76. 

Year: 2008; 
Baseline extended: -1.79; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -2.91. 

Year: 2009; 
Baseline extended: -1.58; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.11. 

Year: 2010; 
Baseline extended: -1.39; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.23. 

Year: 2011; 
Baseline extended: -0.68; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.61. 

Year: 2012; 
Baseline extended: 0.22; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.62. 

Year: 2013; 
Baseline extended: 0.22; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -3.93. 

Year: 2014; 
Baseline extended: 0.30; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -4.18. 

Year: 2015; 
Baseline extended: 0.37; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -4.44. 

Year: 2016; 
Baseline extended: 0.32; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -4.8. 

Year: 2017; 
Baseline extended: -0.03; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -5.39. 

Year: 2018; 
Baseline extended: -0.41; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -6.01. 

Year: 2019; 
Baseline extended: -0.74; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -6.59. 

Year: 2020; 
Baseline extended: -1.13; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -7.24. 

Year: 2021; 
Baseline extended: -1.5; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -7.87. 

Year: 2022; 
Baseline extended: -1.93; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -8.57. 

Year: 2023; 
Baseline extended: -2.34; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -9.25. 

Year: 2024; 
Baseline extended: -2.82; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -10.02. 

Year: 2025; 
Baseline extended: -3.01; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -10.48. 

Year: 2026; 
Baseline extended: -3.41; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -11.17. 

Year: 2027; 
Baseline extended: -3.86; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -11.93. 

Year: 2028; 
Baseline extended: -4.27; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -12.65. 

Year: 2029; 
Baseline extended: -4.73; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -13.44. 

Year: 2030; 
Baseline extended: -5.16; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -14.22. 

Year: 2031; 
Baseline extended: -5.64; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -15.06. 

Year: 2032; 
Baseline extended: -6.07; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -15.88. 

Year: 2033; 
Baseline extended: -6.55; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -16.75. 

Year: 2034; 
Baseline extended: -7.07; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -17.69. 

Year: 2035; 
Baseline extended: -7.53; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -18.59. 

Year: 2036; 
Baseline extended: -8.04; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -19.58. 

Year: 2037; 
Baseline extended: -8.57; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -20.63. 

Year: 2038; 
Baseline extended: -9.04; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -21.65. 

Year: 2039; 
Baseline extended: -9.56; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -22.77. 

Year: 2040; 
Baseline extended: -10.04; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -23.92. 

Year: 2041; 
Baseline extended: -10.58; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -25.20. 

Year: 2042; 
Baseline extended: -11.17; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -26.61. 

Year: 2043; 
Baseline extended: -11.69; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -28.09. 

Year: 2044; 
Baseline extended: -12.30; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -29.80. 

Year: 2045; 
Baseline extended: -12.88; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -31.80. 

Year: 2046; 
Baseline extended: -13.54; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -34.07. 

Year: 2047; 
Baseline extended: -14.17; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -36.95. 

Year: 2048; 
Baseline extended: -14.88; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: -40.92. 

Year: 2049; 
Baseline extended: -15.56; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: N/A. 

Year: 2050; 
Baseline extended: -16.33; 
Discretionary spending grows with the economy and all expiring tax 
provisions extended: N/A. 

Source: GAO's January 2006 analysis. 

Note: Assume currently scheduled Social Security benefits are paid in 
full throughout the simulation period. 

[End of figure] 

Composition of Spending as a Share of GDP Under Baseline Extended 
(January 2001): 

[See PDF for image] - graphic text: 
	
Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 

2005; 
Net interest: 0.8%; 
Social Security: 4.3%; 
Medicare & Medicaid: 3.7%; 
All other spending: 8.0%; 
Revenue: 20.3%. 

2015[A]; 
Net interest: 0%; 
Social Security: 5.1%; 
Medicare & Medicaid: 4.9%; 
All other spending: 5.6%; 
Revenue: 20.4%. 

2030[A]; 
Net interest: 0%; 
Social Security: 6.6%; 
Medicare & Medicaid: 9.4%; 
All other spending: 4.0%; 
Revenue: 20.4%. 

2040[A]; 
Net interest: 0%; 
Social Security: 6.7%; 
Medicare & Medicaid: 9.0%; 
All other spending: 4.4%; 
Revenue: 20.4%.


Source: GAO's January 2001 analysis. 

[A] All other spending is net of offsetting interest receipts. 

[End of figure]  

Composition of Spending as a Share of GDP Assuming Discretionary 
Spending Grows with GDP After 2006 and All Expiring Tax Provisions are 
Extended: 

[See PDF for image] - graphic text: 
	
Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 	
	
2005; 
Net interest: 1.5%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.5%; 
Revenue: 17.5% 

2015; 
Net interest: 2.5%; 
Social Security: 4.5%; 
Medicare & Medicaid: 5.3%; 
All other spending: 9.8%; 
Revenue: 17.5% 

2030; 
Net interest: 7%; 
Social Security: 6.7%; 
Medicare & Medicaid: 8.5%; 
All other spending: 9.8%; 
Revenue: 17.6% 

2040; 
Net interest: 14%; 
Social Security: 7.6%; 
Medicare & Medicaid: 10.3%; 
All other spending: 9.8%; 
Revenue: 17.6%

Source: GAO's August 2006 analysis. 

[End of figure] 

Federal Tax Expenditures Exceeded Discretionary Spending for Half of 
the Last Decade: 

Dollars in billions (in real 2005 dollars) 1400: 

[See PDF for Image] - graphic text: 

Fiscal year: 1982; 
Mandatory spending: $601.60; 
Sum of tax expenditure revenue loss estimates: $463.30; 
Discretionary spending: $585.80. 

Fiscal year: 1983;  
Mandatory spending: $628.50; 
Sum of tax expenditure revenue loss estimates: $499.60; 
Discretionary spending: $608.00. 

Fiscal year: 1984;  
Mandatory spending: $599.60; 
Sum of tax expenditure revenue loss estimates: $529.70; 
Discretionary spending: $629.70. 

Fiscal year: 1985; 
Mandatory spending: $644.80; 
Sum of tax expenditure revenue loss estimates: $568.70; 
Discretionary spending: $688.40. 

Fiscal year: 1986; 
Mandatory spending: $653.40; 
Sum of tax expenditure revenue loss estimates: $618.80; 
Discretionary spending: $688.90. 

Fiscal year: 1987; 
Mandatory spending: $645.00; 
Sum of tax expenditure revenue loss estimates: $577.10; 
Discretionary spending: $680.10. 

Fiscal year: 1988;  
Mandatory spending: $665.30; 
Sum of tax expenditure revenue loss estimates: $448.10; 
Discretionary spending: $689.30. 

Fiscal year: 1989;  
Mandatory spending: $694.40; 
Sum of tax expenditure revenue loss estimates: $474.50; 
Discretionary spending: $698.40. 

Fiscal year: 1990;  
Mandatory spending: $782.80; 
Sum of tax expenditure revenue loss estimates: $480.10; 
Discretionary spending: $689.60. 

Fiscal year: 1991; 
Mandatory spending: $792.10; 
Sum of tax expenditure revenue loss estimates: $472.00; 
Discretionary spending: $708.10. 

Fiscal year: 1992; 
Mandatory spending: $839.90; 
Sum of tax expenditure revenue loss estimates: $488.20; 
Discretionary spending: $691.40. 

Fiscal year: 1993; 
Mandatory spending: $850.30; 
Sum of tax expenditure revenue loss estimates: $494.80; 
Discretionary spending: $683.10. 

Fiscal year: 1994; 
Mandatory spending: $889.70; 
Sum of tax expenditure revenue loss estimates: $520.20; 
Discretionary spending: $671.20. 

Fiscal year: 1995; 
Mandatory spending: $897.20; 
Sum of tax expenditure revenue loss estimates: $538.80; 
Discretionary spending: $661.60. 

Fiscal year: 1996; 
Mandatory spending: $937.40; 
Sum of tax expenditure revenue loss estimates: $541.70; 
Discretionary spending: $634.60. 

Fiscal year: 1997; 
Mandatory spending: $948.60; 
Sum of tax expenditure revenue loss estimates: $565.70; 
Discretionary spending: $640.70. 

Fiscal year: 1998; 
Mandatory spending: $994.40; 
Sum of tax expenditure revenue loss estimates: $640.10; 
Discretionary spending: $638.70. 

Fiscal year: 1999; 
Mandatory spending: $1028.10; 
Sum of tax expenditure revenue loss estimates: $688.60; 
Discretionary spending: $653.20. 

Fiscal year: 2000; 
Mandatory spending: $1064.90; 
Sum of tax expenditure revenue loss estimates: $720.10; 
Discretionary spending: $688.10. 

Fiscal year: 2001; 
Mandatory spending: $1101.90; 
Sum of tax expenditure revenue loss estimates: $780.90; 
Discretionary spending: $710.00. 

Fiscal year: 2002; 
Mandatory spending: $1186.60; 
Sum of tax expenditure revenue loss estimates: $808.80; 
Discretionary spending: $787.90. 

Fiscal year: 2003; 
Mandatory spending: $1243.20; 
Sum of tax expenditure revenue loss estimates: $775.90; 
Discretionary spending: $868.50. 

Fiscal year: 2004; 
Mandatory spending: $1271.40; 
Sum of tax expenditure revenue loss estimates: $748.20; 
Discretionary spending: $920.20. 

Fiscal year: 2005; 
Mandatory spending: $1319.80; 
Sum of tax expenditure revenue loss estimates: $775.70; 
Discretionary spending: $968.50. 

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal 
years 1976-2007. 

Note: Summing tax expenditure estimates does not take into account 
interactions between individual provisions. Outlays associated with 
refundable tax credits are included in mandatory spending. 

[End of figure] 

Current Fiscal Policy Is Unsustainable: 

The "Status Quo" is Not an Option: 

* We face large and growing structural deficits largely due to known 
demographic trends and rising health care costs. 

* GAO's simulations show that balancing the budget in 2040 could 
require actions as large as: 

- Cutting total federal spending by 60 percent or: 

- Raising federal taxes to 2 times today's level: 

Faster Economic Growth Can Help, but It Cannot Solve the Problem: 

* Closing the current long-term fiscal gap based on reasonable 
assumptions would require real average annual economic growth in the 
double digit range every year for the next 75 years. 

* During the 1990s, the economy grew at an average 3.2 percent per 
year. 

* As a result, we cannot simply grow our way out of this problem. Tough 
choices will be required. 

The Way Forward: A Three-Pronged Approach: 

1. Improve Financial Reporting, Public Education, and Performance 
Metrics: 

2. Strengthen Budget and Legislative Processes and Controls: 

3. Fundamental Reexamination & Transformation for the 21St Century 
(i.e., entitlement programs, other spending, and tax policy): 

Solutions Require Active Involvement from both the Executive and 
Legislative Branches: 

The Way Forward: Improve Financial Reporting, Public Education, and 
Performance Metrics: 

Improve transparency & completeness of President's budget proposal: 

* Return to 10-year estimates in budget both for current policies and 
programs and for policy proposals: 

* Include in the budget estimates of long-term cost of policy proposals 
& impact on total fiscal exposures. 

* Improve transparency of tax expenditures: 

Consider requiring President's budget to specify & explain a fiscal 
goal and a path to that goal within 10-year window or justify an 
alternative deadline: 

Require annual OMB report on existing fiscal exposures [liabilities, 
obligations, explicit & implied commitments] 

Require enhanced financial statement presentation and preparation of 
summary annual report that is both useful and used: 

Increase information on long-range fiscal sustainability issues in 
Congressional Budget Resolution & Budget Process. 

Develop key national (outcome-based) indicators (e.g. economic, 
security, social, environmental) to chart the nation's posture, 
progress, and position relative to the other major industrial 
countries: 

The Way Forward: Strengthen Budget and Legislative Processes and 
Controls: 

Restore discretionary spending caps & PAYGO rules on both spending and 
tax sides of the ledger: 

Develop mandatory spending triggers [with specific defaults], and other 
action-forcing provisions (e.g., sunsets) for both direct spending 
programs and tax preferences: 

Develop, impose & enforce modified rules for selected items (e.g., 
earmarks, emergency designations, and use of supplementals): 

Require long-term cost estimates (e.g. present value) for any 
legislative debate on all major tax and spending bills, including 
entitlement programs. Cost estimates should usually assume no sunset: 

Extend accrual budgeting to insurance & federal employee pensions; 
develop techniques for extending to retiree health & environmental 
liabilities: 

Consider biennial budgeting: 

Consider expedited line item rescissions from the President that would 
only require a majority vote to override the proposed rescission(s): 

The Way Forward: Fundamental Reexamination & Transformation: 

Restructure existing entitlement programs: 

Reexamine and restructure the base of all other spending: 

Review & revise existing tax policy, including tax preferences and 
enforcement programs: 

Expand scrutiny of all proposed new programs, policies, or activities: 

Reengineer internal agency structures and processes, including more 
emphasis on long-term planning, integrating federal activities, and 
partnering with others both domestically and internationally: 

Strengthen and systematize congressional oversight processes: 

Increase transparency associated with government contracts and other 
selected items: 

Consider a capable, credible, bi-partisan entitlement and tax reform 
commission along the lines proposed by Sen. Voinovich and Cong. Wolf: 

GAO's High-Risk List 2006: 

Addressing Challenges in Broad-based Transformations: 

High-Risk Areas: Protecting the Federal Government's Information 
Systems and the Nation's Critical Infrastructures; 
Year Designated High Risk: 1997. 

High-Risk Areas: Strategic Human Capital Management[A]; 
Year Designated High Risk: 2001. 

High-Risk Areas: U.S. Postal Service Transformation Efforts and Long-
Term Outlook[A]; 
Year Designated High Risk: 2001. 

High-Risk Areas: Managing Federal Real Property[A]; 
Year Designated High Risk: 2003. 

High-Risk Areas: Implementing and Transforming the Department of 
Homeland Security; 
Year Designated High Risk: 2003. 

High-Risk Areas: Establishing Appropriate and Effective Information-
Sharing Mechanisms to Improve Homeland Security; 
Year Designated High Risk: 2005. 

High-Risk Areas: DOD Approach to Business Transformation[A]; 
Year Designated High Risk: 2005. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Supply 
Chain Management (formerly Inventory Management); 
Year Designated High Risk: 1990. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD Weapon 
Systems Acquisition; 
Year Designated High Risk: 1990. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD 
Business Systems Modernization; 
Year Designated High Risk: 1995. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD 
Financial Management; 
Year Designated High Risk: 1995. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD 
Support Infrastructure Management; 
Year Designated High Risk: 1997. 

High-Risk Areas: DOD Approach to Business Transformation[A]: DOD 
Personnel Security Clearance Program; 
Year Designated High Risk: 2005. 

Managing Federal Contracting More Effectively: 

High-Risk Areas: DOE Contract Management; 
Year Designated High Risk: 1990. 

High-Risk Areas: NASA Contract Management; 
Year Designated High Risk: 1990. 

High-Risk Areas: DOD Contract Management; 
Year Designated High Risk: 1992. 

Management of Interagency Contracting; 
Year Designated High Risk: 2005. 

Assessing the Efficiency and Effectiveness of Tax Law Administration: 

High-Risk Areas: Enforcement of Tax Laws[A,B]; 
Year Designated High Risk: 1990. 

High-Risk Areas: IRS Business Systems Modernization[C]; 
Year Designated High Risk: 1995. 

Modernizing and Safeguarding Insurance and Benefit Programs: 

High-Risk Areas: Medicare Program[A]; 
Year Designated High Risk: 1990. 

High-Risk Areas: HUD Single-Family Mortgage Insurance and Rental 
Housing Assistance Programs; 
Year Designated High Risk: 1994. 

High-Risk Areas: Medicaid Program[A]; 
Year Designated High Risk: 2003. 

High-Risk Areas: Modernizing Federal Disability Programs[A]; 
Year Designated High Risk: 2003. 

High-Risk Areas: Pension Benefit Guaranty Corporation Single-Employer 
Insurance Program[A]; 
Year Designated High Risk: 2003. 

High-Risk Areas: National Flood Insurance Program; 
Year Designated High Risk: 2006. 

Other: 

High-Risk Areas: FAA Air Traffic Control Modernization; 
Year Designated High Risk: 1995. 

Source: GAO. 

[A] Legislation is likely to be necessary, as a supplement to actions 
by the executive branch, in order to effectively address this high-risk 
area. 

[B] Two high-risk areas-Collection of Unpaid Taxes and Earned Income 
Credit Noncompliance-have been consolidated to make this area. 

[C] The IRS Financial Management high-risk area has been incorporated 
into this high-risk area. 

[End of table] 

Suggested DOD Related Oversight Areas for the 110th Congress: 

Address acquisition and contracting issues. 

Transform business operations, including addressing all related "High 
Risk" areas. 

Enhance information sharing, accelerate transformation, and improve 
oversight related to the Nation's intelligence agencies. 

Strengthen efforts to prevent proliferation of nuclear, chemical, and 
biological weapons and their delivery systems (missiles). 

Ensure a successful transformation of the nuclear weapons complex. 

Review U.S. and Coalition efforts to stabilize and rebuild Iraq and 
Afghanistan, including how these efforts are to be funded. 

Assess overall military readiness, transformation efforts, and existing 
plans to assure the sustainability of the All-Volunteer Force. 

Note: From November 17, 2006 letter to the 110th Congress (GAO-07- 
235R). 

DOD Faces the Challenge of Balancing Near Term and Long Term Wants, 
Needs, and Affordability: 

In FY 2007 constant dollars, DOD's regular budget has grown from about 
$351 billion in FY 2001 to about $425 billion in FY 2006. To date, 
DOD's FY 2007 regular budget is funded at about $378 billion, with 
decisions on additional funding for military construction and other 
programs still pending. Supplemental funding for the Global War on 
Terrorism (GWOT) has added hundreds of billions of dollars to DOD's 
available budgetary resources. 

Near term, DOD is paying for the GWOT and facing challenges in 
maintaining readiness. 

Long term, DOD must address military pay and benefits and weapons 
modernization and force transformation, which may not be affordable or 
sustainable. 

DOD's efforts to transform its business systems and processes will take 
many years to achieve, but could free up resources through efficiencies 
and reduction in waste. 

DOD's Regular Budget Growth: (Excluding GWOT): 

DOD Regular Appropriations FY 2001-2007: 

[See PDF for Image]- graphic text: 

Bar graph. 

Dollars in billions. 

Year: 2001; 
Amount: $351.4. 

Year: 2002; 
Amount: $378.1. 

Year: 2003; 
Amount: $409.8. 

Year: 2004; 
Amount: $411.5. 

Year: 2005; 
Amount: $422.5. 

Year: 2006; 
Amount: $425.5. 

Year: 2007; 
Amount: $377.6. 

Source: GAO analysis of Congressional Research Service data. 

Note: The FY 2007 figure does not include funding for military 
construction and other programs, which is being considered in a single 
appropriations bill that has not yet been passed. All amounts are in 
constant 2007 dollars. 

[End of figure] 

Total Budgetary Resources Provided to DOD Total Defense Resources FY 
2001-2007 (as of January 2007): 

[See PDF for Image] - graphic text: 

Bar graph each divided into 3 or 4 sections. 

Year: 2005; 
Regular: $422.5; 
Bridge: $26.3; 
Supplement: $83.2; 
Estimated Supplement Request: $0. 

Year: 2006; 
Regular: $425.5; 
Bridge: $51.2; 
Supplement: $75.8; 
Estimated Supplement Request: $0. 

Year: 2007; 
Regular: $377.6; 
Bridge: $70. 
Supplement: $0. 
Estimated Supplement Request: $99.7. 

Source: GAO analysis of Congressional Research Service data. 

Notes: Bridge, or Title IX, is the section of DOD's regular defense 
appropriation that outlines emergency spending provisions for 
operations in support of GWOT. The figure shown for the FY 2007 regular 
appropriation does not include funding for military construction and 
other programs, which is being considered in a single appropriations 
bill that has not yet been passed. DOD's FY 2007 supplemental request, 
not yet submitted, has been estimated at about $100 billion. All 
amounts are in constant 2007 dollars. 

[End of Figure] 

DOD's Reported GWOT Obligations for FY 2001 thru FY 2006: 

[See PDF for Image] - graphic text: 

Bar graph. 

Dollars in billions. 

FY01: $0.25. 
FY02: $16.64. 
FY03: $61.03. 
FY04: $71.26. 
FY05: $84.79. 
Fy06: $98.44. 

Source: GAO analysis of DOD data. 

Notes: Reported GWOT obligations include Operation Noble Eagle, 
Operation Enduring Freedom, and Operation Iraqi Freedom. Figures do not 
include about $17.9 billion obligated in FY 2001-2003 that DOD did not 
include in its cost reports, or any obligations for classified 
activities. GAO has assessed the reliability of DOD's obligation data 
and found significant problems, such that they may not accurately 
reflect the true dollar value of GWOT obligations. 

[End of figure] 

DOD's Reported GWOT Obligations by Operation for FYs 2004, 2005, 2006: 

[See PDF for Image] - graphic text: 

Bar graph with 3 column divided into 3 sections. 

Dollars in billions. 

FY04; 
OIF: $57.15; 
OEF: $10.26; 
ONE: $3.83. 

FY05; 
OIF: $71.99; 
OEF: $10.61; 
ONE: $2.13. 

FY06; 
OIF: $84.43; 
OEF: $14.19; 
ONE: $0.82. 

Source: GAO. 

Note: GAO has assessed the reliability of DOD's obligation data and 
found significant problems, such that they may not accurately reflect 
the true dollar value of GWOT obligations. 

[End of figure] 

Increased Budget Transparency Needed: 

Based on recent DOD guidance, the rules governing what can be included 
in the FY 2007 supplemental funding request have been expanded to 
include items not strictly limited to ongoing operations, but to 
overall efforts related to the larger war on terror. 

The lines between what is being funded through regular and supplemental 
appropriations are becoming increasingly blurred, making it difficult 
for decision makers to understand and balance DOD's wants, needs, and 
affordability. 

To provide greater transparency over its budget, DOD should consider 
moving certain GWOT costs into its regular budget to assist decision 
makers in weighing priorities and trade-offs when making financial 
decisions. 

DOD needs to take stronger actions to control GWOT costs by setting 
general parameters to guide commanders' and services' cost control 
efforts. 

GAO has found significant reliability problems with the GWOT cost data, 
which impedes the ability of Congress and others to make informed 
decisions about GWOT costs and related funding needs. 

Balancing Wants, Needs and Affordability: Maintaining Near Term 
Readiness: 

Readiness is being measured against two different standards 1) the 
traditional war time missions that units are expected to undertake 
based on their structure, and 2) their currently directed missions- 
primarily, supporting operations in Iraq and Afghanistan. 

Although there are some concerns with deployed units, the deployed 
units are in better shape to undertake the currently directed missions 
than non-deployed units because they receive priority for personnel and 
equipment. 

When measured against traditional war time missions, there are 
readiness concerns (equipment, personnel, and training) for both 
deployed and non-deployed units: 

Balancing Wants, Needs and Affordability: Reexamining Active Duty 
Personnel Pay and Benefits: 

The cost of active duty pay and benefits was $158 billion in fiscal 
year 2004 and growing.

Enhanced pay and benefits, including health care costs, increased costs 
to an average of $111,783 per person.

DOD needs to assess the affordability and sustainability of the 
compensation system and the reasonableness and appropriateness of the 
allocation to cash and benefits and whether changes could more 
efficiently achieve recruiting and retention goals.

Figure: Total Compensation Costs for Fiscal Years 200-2004: 

(2004 constant dollars)

Bar graph. 

2000: $123. 
2001: $131. 
2002: $141. 
2003: $155. 
2004: $158. 

Source: GAO-05-798. 

Notes: Our calculations include supplemental funding for the Global War 
on Terrorism. Since fiscal year 2002 over 100,000 mobilized reservists 
were paid out of the cash compensation. If you considered these 
personnel, the average costs to provide compensation would be about 
$5,000 per capita lower. 

[End of Figure] 

Balancing Wants, Needs and Affordability: Reexamining Health Care 
Benefits: 

The cost of TRICARE more than doubled from FY01 to FY05. 

Costs have grown due to increases in enrollment, benefits, medical 
inflation, and GWOT. 

TRICARE does not fully utilize market incentives to shape utilization. 

TRICARE has low enrollment fees, deductibles, and other beneficiary 
expenses compared to other plans. 

TRICARE Beneficiaries in Fiscal Year 2005: 

[See PDF for Image] - graphic text: 

Pie chart divided into 3 section. 

14%: TRICARE for Life retirees and dependents (generally age 65 and 
older): 
42%: Active duty personnel and dependents: 
44%: Retirees and dependents (generally under age 65). 

Source: GAO-07-48, 

DOD Estimates of Factors Contributing to increases in DOD's Health Care 
Costs, 2001-2005: 

[See PDF for Image]- graphic text: 

Pie chart divided into 5 sections. 

5%: Other Congressionally-Mandated Benefit Changes; 
49%: TRICARE for Life; 
6%: GWOT; 
33%: Medical Inflation; 
7%: Increase in Retirees and Dependents Under 65. 

Source: GAO analysis of DOD data (bottom pie). 

[End of figure] 

Balancing Wants, Needs and Affordability: Funding Weapons Modernization 
and Force Transformation: 

From fiscal years 2001 to 2006, DOD has doubled its planned investments 
in new systems from about $700 billion to nearly $1.4 trillion, but 
this has not produced more stability or better outcomes. 

DOD is also restructuring forces to execute operations in the new 
security environment more effectively. This includes such efforts as 
Army modularity, which has grown in cost from an estimated $28 billion 
in 2004 to $52.5 billion as of April 2006. 

DOD Continues to Confront Pervasive, Longstanding Management Problems 
Related to Its Business Operations: 

Management weaknesses cut across all of DOD's major business areas, and 
its approach to business transformation was designated as high risk in 
2005. 

Examples of longstanding issues include: 

* Supply chain management has been designated high risk since 1990: 

* Weapons System Acquisition was also designated high risk in 1990: 

* Financial Management has been designated as high-risk since 1995: 

Systemic Defense Acquisition Challenges: 

1. Service budgets are allocated largely according to top line 
historical percentages rather than Defense-wide strategic assessments 
and current and likely resource limitations. 

2. Capabilities and requirements are based primarily on individual 
service wants versus collective Defense needs (i.e. based on current 
and expected future threats) that are both affordable and sustainable 
over time. 

3. Defense consistently over-promises and under-delivers in connection 
with major weapons, information, and other systems (i.e. capabilities, 
costs, quantities, schedule). 

4. Defense often employs a "plug and pray approach" when costs escalate 
(i.e. divide total funding dollars by cost per copy, plug the number 
that can be purchased, then pray that Congress will provide more 
funding to buy more quantities). 

5. Congress sometimes forces the department to buy items (e.g. weapons 
systems) and provide services (e.g. additional health care for non- 
actives) that the department does not want and we cannot afford. 

6. DOD tries to develop high risk technologies after programs start 
instead of setting up funding, organizations, and processes to conduct 
high risk technology development activities in low cost environments 
(i.e. technology development is not separated from product 
development). Program decisions to move into design and production are 
made without adequate standards or knowledge. 

7. Program requirements are often set at unrealistic levels, then 
changed frequently as recognition sets in that they cannot be achieved. 
As a result, too much time passes, threats may change, and/or members 
of the user and acquisition communities may simply change their mind. 
The resulting program instability causes cost escalation, schedule 
delays, fewer quantities and reduced contractor accountability. 

8. Contracts, especially service contracts, often do not have 
definitive or realistic requirements at the outset in order to control 
costs and facilitate accountability. 

9. Contracts typically do not accurately reflect the complexity of 
projects nor appropriately allocate risk between the contractors and 
the taxpayers (e.g. cost plus, cancellation charges): 

10. Key program staff rotate too frequently thus promoting myopia and 
reducing accountability (i.e. tours based on time versus key 
milestones). Additionally, the revolving door between industry and the 
Department presents potential conflicts of interest. 

11. The acquisition workforce faces serious challenges (e.g. size, 
skills, knowledge, succession planning). 

12. Incentive and award fees are often paid based on contractor 
attitudes and efforts versus positive results (i.e. cost, quality, 
schedule). 

13. Inadequate oversight is being conducted by both the Defense 
Department and the Congress which results in little to no 
accountability for recurring and systemic problems. 

14. Some individual program and funding decisions made within the 
Department and by the Congress serve to undercut sound policies. 

15. Lack of a professional, term-based CIVIO at DOD serves to slow 
progress on defense transformation and reduce the chance of success in 
the acquisitions/contracting and other key business areas. 

Selected Potential DOD Transformation Related Actions: 

Revise the current approach to developing national military strategy 
(e.g., order, integration): 

Take a longer range, and more enterprise-wide approach to program 
planning and budget integration (e.g., life cycles, opportunity costs): 

Employ a more strategic and integrated approach to business information 
system efforts and financial audit initiatives: 

Differentiate between war fighting and business systems development, 
implementation, and maintenance (e.g., resource control, project 
approval): 

Focus on achieving real success in connection with financial management 
efforts (e.g., systems, controls, information, compliance and 
opinions): 

Employ a total force management approach to planning and execution 
(e.g., military, civilian, contractors): 

Get the design and implementation of the NSPS right, including 
modernizing and integrating the DOD, Service, domain, unit, and 
individual performance measurement and reward systems: 

Revise the process for developing and communicating key changes (e.g., 
DOD transformation, NSPS): 

Reduce the number of layers, silos, and footprints: 

Recognize the difference between approving and informing: 

Review and revise current military compensation policies and practices 
(e.g., more targeted and market-based): 

Strengthen emphasis on horizontal and external activities (e.g., 
partnerships): 

Create a Chief Management Officer to drive the business transformation 
process: 

On the Web: 

Web site: [Hyperlink, http://www.gao.gov/cghome.htm]: 

Contact: 

Paul Anderson, Managing Director, Public Affairs AndersonP1@gao.gov 
(202) 512-4800: 

U.S. Government Accountability Office 441 G Street NW, Room 7149 
Washington, D.C. 20548: 

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