The Federal Government's Long-Term Fiscal Outlook: Spring 2012 Update

What GAO Found

Federal deficits and debt have reached historic highs in recent years. Congress has taken action to address the fiscal imbalance, but longer-term challenges remain. The Budget Control Act (BCA) of 2011 limits spending over the next decade and leads to an improved fiscal outlook. The act targets discretionary spending, and under both of GAO’s simulations, discretionary spending as a share of the economy would be lower in 2022 than at any point in the last 50 years. Further, as the economy recovers, revenue increases and spending decreases. While the BCA improved the outlook, it did not eliminate the longer-term challenge, in part because it did not focus on the fundamental drivers of the government’s future fiscal imbalances—a structural gap between revenues and spending driven by rising health care costs and demographics. As our 2011 simulations showed, if the Patient Protection and Affordable Care Act (PPACA) is implemented as intended it would have a major effect on the gap but would not eliminate it. The aging of the population and rising health care costs will continue putting upward pressure on spending. Assuming revenue in the long term returns to the 40-year historical average and remains stable at that share of GDP, the imbalance between spending and revenues increases, resulting in increasing levels of debt held by the public. A continuing increase in debt as a share of GDP means the federal government is on an unsustainable long-term fiscal path and underscores the need for policymakers to act to change the path.

The pace at which deficits grow and the resulting debt buildup vary depending on the assumptions used: deficits and debt grow less rapidly in the Baseline Extended simulation than under the Alternative simulation, which has both lower revenues and higher spending levels than the Baseline Extended simulation. Under the Baseline Extended simulation, debt held by the public would exceed its post–World War II historical high of 109 percent of GDP by 2048; under the Alternative simulation it would cross this threshold by 2026.

The growing fiscal imbalance is driven on the spending side by rising health care costs and the aging of the population. The oldest members of the baby-boom generation are already eligible for Social Security retirement benefits and for Medicare. The Social Security program, which historically ran large cash surpluses that helped reduce the need to borrow from the public to finance other programs, is now projected to pay more in benefits than it receives in tax income each year into the future. Although health care spending growth recently slowed, it has been growing faster than the overall economy and is expected to continue to grow at an increased rate as more members of the baby-boom generation become eligible for federal health programs. The number of baby boomers turning 65 is projected to grow in coming years, averaging about 7,600 per day in 2011, and about 11,400 per day by 2029.

Why GAO Did This Study

Since 1992, GAO has published long-term fiscal simulations showing federal deficits and debt under different sets of policy 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 context for consideration of policy options. They are not intended to suggest particular policy choices or to predict the economic impact of any set of choices but to help facilitate a dialogue on this important issue.

GAO regularly updates its simulations as new data become available from the Congressional Budget Office (CBO) and the Social Security and Medicare Trustees (Trustees). This update incorporates CBO’s January 2012 budget and economic projections. As in the past, GAO shows two simulations:

The Baseline Extended simulation follows CBO’s January 2012 baseline, which generally reflects current law, for the first 10 years. The baseline includes the effects from the discretionary spending caps and automatic enforcement procedures put in place by the Budget Control Act (BCA). After the first 10 years, this fiscal constraint is maintained; revenue and spending other than interest on the debt and large entitlement programs (Social Security, Medicare, and Medicaid) are held constant as a share of gross domestic product (GDP). Over the long term, revenue as a share of GDP is higher and discretionary spending lower than historical averages.

In the Alternative simulation, expiring tax provisions are extended to 2022 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2022. For the first 10 years, discretionary spending reflects the original caps set by the BCA but not the lower caps triggered by the automatic enforcement procedures. Over the long term, discretionary spending and revenue are held at historical averages.

The Baseline Extended simulation follows the Trustees’ 2011 intermediate projections for Social Security and Medicare and CBO’s June 2011 long-term projections for Medicaid adjusted to reflect excess cost growth consistent with the Trustees’ projections. In the Alternative simulation, Medicare spending is based on the Centers for Medicare & Medicaid Services Office of the Actuary’s (CMS Actuary) alternative projections that assume reductions in Medicare physician rates do not occur as scheduled under current law and that certain cost- containment mechanisms intended to slow the growth of health care cost are not sustained over the long term. GAO also shows the outlook using CBO’s long-term projections for Social Security and the major health entitlements; the results are consistent with GAO’s simulations based largely on the Trustees.

Additional information on the fiscal outlook and federal debt is available at www.gao.gov/special.pubs/longterm/.

For more information, contact Susan J. Irving at (202) 512-6806 or irvings@gao.gov or Thomas J. McCool, at (202) 512-2642 or mccoolt@gao.gov.