The Federal Government's Long-Term Fiscal Outlook: January 2011 Update [Reissued on March 22, 2011]

Since 1992, GAO has published long-term fiscal simulations showing federal deficits and debt levels under different sets of assumptions. 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 but rather to help facilitate a dialogue on this important issue. As in the past, GAO shows two simulations: "Baseline Extended" and an "Alternative." The Baseline Extended follows the Congressional Budget Office's (CBO) January 2011 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). Revenue as a share of GDP over the entire period is higher than the historical average; discretionary spending is below average. In the Alternative simulation, tax provisions other than the temporary Social Security payroll tax reduction are extended to 2021 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2021; revenues are then brought back to the historical average as a share of GDP; discretionary spending other than Recovery Act provisions grows with GDP during the entire period--keeping it just below the 40-year historical average as a share of GDP. Both simulations are run using two different projections for Social Security and the major health entitlements. For Baseline Extended, GAO uses (1) the Social Security and Medicare Trustees' (Trustees) 2010 intermediate projections and (2) the CBO long-term projections that are closest to current law. For the Alternative, projections for the major health entitlement programs are based on (1) the Centers for Medicare & Medicaid Services Office of the Actuary's (CMS Actuary) alternative projections, which assume that certain cost containment mechanisms intended to slow the growth of health care cost are not sustained, and (2) the CBO alternative long-term projections, which assume that some of the policies intended to restrain growth in health care spending do not continue after 2020. Medicare physician rates in both the CMS Actuary and CBO alternative projections are not reduced as in CBO's baseline. GAO also calculates the fiscal gap--the size of action that must be taken to stabilize debt at the current share of GDP.

As the U.S. economy slowly recovers from the most severe recession in several decades, GAO's long-term simulations underscore the need to begin addressing the long-term federal fiscal outlook. The recent economic downturn and the federal government's response caused budgets deficits in the last 3 years to rise to levels not seen since World War II. However, the structural imbalance between spending and revenue paths in the federal budget predates the financial crisis and economic downturn. GAO's long-term simulations show that even as the economy recovers and policies to stimulate the economy wind down, the outlook is for large and growing deficits. Absent policy changes, budget deficits decline slightly under GAO's Alternative simulation before returning to recent highs in little over 10 years and increasing continually thereafter. In both simulations, the accumulation of large budget deficits leads to an unsustainable increase in debt over the long term. In GAO's Alternative simulation, for instance, debt held by the public exceeds the post-World War II high of 109 percent of GDP by 2021 and continues to grow thereafter. Debt at these levels also would limit budget flexibility, affecting the federal government's ability to respond to a future economic downturn or financial crisis. The longer action to deal with the nation's long-term fiscal outlook is delayed, the greater the magnitude of the changes needed and the risk that the eventual changes will be disruptive and destabilizing. The timing of deficits and the resulting debt buildup varies depending on the assumptions used. Debt held by the public increases more rapidly in the near term in our Alternative simulation largely because expiring tax provisions are extended and discretionary spending grows with GDP, whereas in the Baseline Extended simulation, tax provisions expire as scheduled under current law and discretionary spending grows with inflation. In both simulations, federal spending over the long term is driven largely by rising health care costs and an aging population, which increase spending for major federal social insurance programs (e.g., Social Security and Medicare). As in previous updates, GAO shows the Baseline Extended simulation using both Trustees and CBO estimates for long-term spending on Social Security and major health entitlement programs (Medicare, Medicaid, and others). In addition, GAO shows its Alternative simulation using different assumptions about the sustainability of certain health care cost containment provisions based on CBO and CMS Actuary alternative projections.

Reissued on March 22, 2011