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

What GAO Found

GAO's simulations continue to illustrate that the federal government is on an unsustainable long-term fiscal path. In both the Baseline Extended and Alternative simulations, debt held by the public grows as a share of gross domestic product (GDP) over the long term. While the timing and pace of growth varies depending on the assumptions used, neither set of assumptions achieves a sustainable path. In the Baseline Extended simulation, which assumes current law, including the discretionary spending limits and other spending reductions contained in the Budget Control Act (BCA) of 2011 and expiration of certain tax cuts enacted in 2001 and 2003, debt as a share of GDP declines in the short term before turning up again. In the Alternative simulation, in which these laws are assumed to not take full effect, federal debt as a share of GDP grows throughout the period. Discretionary spending limits alone do not address the fundamental imbalance between estimated revenue and spending, which is driven largely by the aging of the population and rising health care costs. The Patient Protection and Affordable Care Act (PPACA) slows the growth of health care spending and federal debt under the Baseline Extended simulation, in which cost-containment mechanisms are assumed to be fully implemented and effective. However, some have questioned whether these mechanisms can be sustained over the long term; this is reflected in GAO's Alternative simulation.

Significant actions to change the long-term fiscal path must be taken and the design of these actions should take into account concerns about the near-term impact on economic growth. In the near term, for example, the Baseline Extended simulation reflects a number of fiscal policy changes contained in current law that are projected to sharply reduce spending and raise revenue from their current levels beginning in 2013. CBO, the Federal Reserve Board Chairman, and others project that such drastic fiscal tightening--commonly referred to as the "fiscal cliff"--could disrupt economic growth. In the Alternative simulation, historcial trends and past policy preferences are assumed to continue; revenue is lower and spending is higher than in the Baseline Extended simulation. While CBO projects that continuation of such polices would prevent disruptions to the economy in the very near term, it would lead to higher debt over the long term.

In both GAO simulations spending for the major health and retirement programs will increase in coming decades, putting greater pressure on the rest of the federal budget. For the first few decades this spending is driven largely by the aging of the population. The oldest members of the baby-boom generation are already eligible for Social Security retirement benefits and for Medicare, and the number of baby boomers turning 65 is projected to grow in coming years from an average of about 7,600 per day in 2011 to more than 11,000 per day in 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. This update incorporates the most recent projections released by the Congressional Budget Office (CBO), the Social Security and Medicare Trustees (Trustees), and the Centers for Medicare & Medicaid Services Office of the Actuary (CMS Actuary). As in the past, GAO shows two simulations:

The Baseline Extended simulation follows CBO's August 2012 baseline, which generally reflects current law for the first 10 years. The baseline includes the effects from the discretionary spending limits and automatic enforcement procedures put in place by the 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 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; revenues are then brought back to the historical average as a share of GDP. 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' 2012 intermediate projections for Social Security and Medicare and CBO's June 2012 long-term projections for Medicaid adjusted to reflect excess cost growth consistent with the Trustees' Medicare projections. In the Alternative simulation, Medicare spending is based on the CMS Actuary's 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' projections.

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.