The Federal Government's Long-Term Fiscal Outlook: Fall 2010 Update

Since 1992, GAO has published long-term fiscal simulations showing federal deficits and debt levels under both "Baseline Extended" and an "Alternative" set of assumptions. GAO has regularly updated these twice a year. GAO developed its long-term model in response to a bipartisan request from Members of Congress concerned about the long-term effects of fiscal policy. GAO's simulations provide a broad context for consideration of policy options by illustrating both the importance of taking action and the magnitude of the steps necessary to change the path. They are not intended to suggest particular policy choices that are the prerogative of elected officials but rather to help facilitate a dialog on this important issue. As in the past, GAO shows two simulations: "Baseline Extended" and an "Alternative." Each is run using two different projections for Social Security and the major health entitlements--CBO's baseline and alternative assumptions and the Social Security and Medicare Trustees' (Trustees) intermediate assumptions and projections based on the Centers for Medicare & Medicaid Services Office of the Actuary (CMS Actuary) alternative assumptions. "Baseline Extended" follows the Congressional Budget Office's (CBO) August 2010 baseline estimates for the first 10 years and then simply holds revenue and spending other than interest on the debt and the large entitlement programs (Social Security, Medicare and Medicaid) constant as a share of gross domestic product (GDP). As a share of GDP, revenue over the entire period is higher than the 20-and 40-year historical average; discretionary spending is below both the 20- and 40-year average. In the "Alternative" simulation, all tax provisions are extended to 2020 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2020; revenues are then brought back to the historical average as a share of GDP; discretionary spending grows with GDP during the entire period--keeping it just below the 40-year historical average as a share of GDP; Medicare physician payment rates are not reduced as in CBO's baseline. The two different sets of projections for Social Security and the major health entitlement programs are as follows: For Baseline Extended GAO uses (i) the Social Security and Medicare Trustees' intermediate projections from their most recent report issued in August and (ii) the CBO projections that are closest to current law and CBO's cost estimates for the recently enacted health care legislation. For the Alternative, projections for the major health entitlement programs are based on: (i) The CMS Actuary's alternative projections, which assume that the full cost containment in the health care legislation is not sustained and (ii) the CBO alternative which assumed some of the policies intended to restrain growth in health care spending would not continue after 2020. At this point the spending effects of the cost containment mechanisms are unknown. GAO also calculates the Fiscal Gap-- the size of action that must be taken to stabilize debt at the current share of GDP.