The Federal Government's Long-Term Fiscal Outlook:

Spring 2013 Update

GAO-13-481SP: Published: Apr 11, 2013. Publicly Released: Apr 11, 2013.

Additional Materials:

Contact:

Susan J. Irving
(202) 512-6806
irvings@gao.gov

 

Thomas J. McCool
(202) 512-2642
mccoolt@gao.gov

 

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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 Congressional Budget Office's (CBO) most recent 10-year baseline projections, which include the effects of the American Taxpayer Relief Act (ATRA) of 2012 enacted earlier this year. As in the past, GAO shows two simulations, which differ in the following ways: The Baseline Extended simulation follows CBO's February 2013 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 Budget Control Act (BCA) of 2011. After 2023, 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, such as the research and experimentation tax credit, are extended to 2023; 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 Social Security and Medicare Trustees’ (Trustees) 2012 intermediate projections 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 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 costs 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.

Our long-term simulations continue to highlight the need to focus attention not only on the federal government's near-term budget outlook but also on its longer-term fiscal path. In the near term, deficits are expected to continue to decline from the recent historic highs as the economy recovers and actions taken by Congress and the President begin to take effect. Debt held by the public as a share of gross domestic product (GDP), however, remains well above historical averages. Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path. Rising debt in both simulations is driven by a fundamental imbalance between revenue and spending, which, on the spending side, is driven by the aging of the population and rising health care costs. Significant action to change the long-term fiscal path must be taken soon to minimize the risk that eventual policy changes will be disruptive to individuals and the economy, while also taking into account concerns about near-term economic growth.

The timing and the pace of the debt build-up—and therefore the size of action needed to address it—depend on the specific assumptions used. In the Baseline Extended simulation, which reflects the continuation of current law, debt as a share of GDP declines in the short term before turning up again. In the Alternative simulation, which assumes historical trends and policy preferences continue, federal debt as a share of GDP grows rapidly throughout the period.

The key change in this update is the enactment of ATRA, which, among other changes, permanently extended many of the tax provisions that were previously set to expire under current law and limited the reach of the Alternative Minimum Tax. As a result, revenue in our Baseline Extended simulation is lower as a share of GDP than it was in the Fall 2012 Baseline Extended simulation but remains higher than the 40-year historical average after 2013. In contrast, revenue increased in the first 10 years of the Alternative simulation as a result of changes in tax rates for high-income taxpayers enacted in ATRA. After the first 10 years, however, the Alternative simulation phases into the 40-year historical average for revenue. Therefore, the overall effects of ATRA on the longer-term outlook under this simulation are relatively small.

In both simulations spending for the major health and retirement programs will increase as a share of GDP 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, as shown in figure 2, 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. As a result, the share of the population over the age of 65 is projected to increase from roughly 13 percent to over 19 percent during this time.

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.

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