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Presentation by the Honorable David M. Walker: 
Comptroller General of the United States: 

Fiscal Stewardship and Defense Transformation: 

Speech before the United States Naval Academy: 
Annapolis, Maryland: 
March 8, 2007: 

United States Government Accountability Office: 

GAO-07-600CG: 

I'm delighted to be here this morning to participate in the Naval 
Academy's National Security Economics Seminar. 

When I look around this room, I'm reminded of my son Andy. He's just a 
few years older than most of you here today. Andy was a midshipman at 
Villanova, and he graduated from their NROTC program. Andy served as a 
Marine Corps officer for six years, including a tour in Iraq. My wife, 
Mary, and I are very proud of him, as I'm sure your parents are proud 
of each of you. 

I'm also reminded of other family members and the life I might have 
had. My mother's first cousin graduated from Annapolis and was an all- 
American tailback for Navy. His name was Bobby Tom Jenkins, or "Trigger 
Tom," as he was known at Annapolis. And my Dad was in the Navy for two 
years. Both of them were a big influence on my decision in high school 
to pursue a military career. 

In fact, during my senior year of high school, I received congressional 
appointments to both the Air Force Academy and Annapolis. I had dreams 
of becoming a Marine pilot, maybe even an astronaut. Unfortunately, a 
hearing loss in my left ear derailed those plans. It was a very big 
disappointment at the time. But in life, it's better to focus on the 
future rather than dwell on the past. 

After all, in the end, I still ended up a general: the Comptroller 
General of the United States. And while there are lots of generals and 
admirals in the military, there's only one Comptroller General of the 
United States. And you're looking at him. 

At my core, I'm a very patriotic person. I expect all of you are as 
well. I'm also a member of the Sons of the American Revolution. Some of 
my ancestors fought and died in the American Revolution. As a result, I 
take a great deal of interest in our nation's proud history and 
military might. All of you have my admiration and respect for your 
decision to serve our country. 

Today, I'm going to focus on the state of our nation's finances--in 
both the short and the long term. This subject was highlighted on CBS' 
60 Minutes program this past Sunday evening. As Navy midshipmen, you're 
probably wondering what that has to do with you. But the fact is the 
fiscal choices our public officials make today will determine how our 
government looks in the future. This includes the Defense Department 
(DOD), the United States Navy, and the United States Marine Corps. 

The United States is a great nation. However, we face a range of 
serious sustainability challenges on several fronts, from fiscal policy 
to foreign policy, from homeland security to health care, from Iraq to 
immigration, and from education and energy production to environmental 
protection. Our country is now the world's largest debtor nation. And 
our mounting debt is undermining our ability to deal with a range of 
current and emerging challenges in the 21st century. Our mounting debt 
is also mortgaging the future of younger Americans like each of you. 

On the surface, things seem to be going fine for now. We have steady 
economic growth, low employment, moderate inflation, relatively low 
interest rates, and, for the most part, strong capital markets. Our 
overall standard of living remains exceptionally high. Compared to most 
nations, the United States ranks high on measures like personal income, 
literacy, and home ownership, to name a few. 

We're currently the world's only superpower. And while our system of 
government is sometimes frustrating and dysfunctional, it's still the 
best on earth. Clearly, we Americans have much to be proud of and much 
to be thankful for. 

But unless we make significant changes soon, America may look very 
different in the future. With the looming retirement of the baby 
boomers, spiraling health care costs, and plummeting personal savings 
rates, we face unprecedented fiscal risks in the years ahead. The facts 
on this aren't in dispute. If we stay on our present path, the United 
States faces a prolonged period of debt and decline. We must not allow 
this to happen! It will, however, take leadership and bipartisan action 
to make these tough choices. 

The powerful trends I just mentioned are building silently offshore, 
not unlike a tsunami. We're not in any immediate fiscal danger, but a 
tidal wave of Social Security, Medicare, and Medicaid spending is 
headed our way. It's time to stop partying on the beach and start 
preparing for the deluge. If we don't, our ship of state could be 
swamped. The difficulty is convincing elected officials and the public 
that the time to act is now, while there's still no immediate crisis. 

America's Four Deficits: 

Now, let me tell you what's going on with the deficits in Washington 
and why you need to care. The truth is our country faces not one but 
four interrelated deficits. Together, these deficits have serious 
implications for our future role in the world, our future standard of 
living, our future domestic tranquility, and even our future national 
security. 

The first is the federal budget deficit. Thanks to a combination of out-
of-control federal spending, several major tax cuts, and expired budget 
controls, federal budget deficits have returned with a vengeance. 
Depending on which accounting method you use, the federal deficit last 
year ranged from $248 billion to $450 billion. The $248 billion number 
reflects the unified budget deficit--net of the Social Security 
surplus--which is the most commonly reported measure. This largely cash-
based figure represents the difference between revenues and outlays for 
the government as a whole in a given year. 

But it you look at the net operating cost of the federal government on 
an accrual basis, which is how companies report, you get a deficit of 
$450 billion. This number is more useful and, I would suggest, more 
realistic. Among other things, this number excludes the Social Security 
surpluses. 

While these annual deficit numbers get a lot of press coverage, it's 
the federal government's mounting liabilities and unfunded commitments 
that pose the real threat. I'm talking about things like unfunded 
Social Security and Medicare benefits. In the last six years, the 
estimated total of these accumulating burdens has soared from about $20 
trillion to about $50 trillion, primarily due to an increase in 
unfunded obligations associated with Medicare. 

Fifty trillion dollars translates into an IOU of about $440,000 for 
every American household. Keep in mind that the median household income 
in this country is less than $50,000 a year. For the typical family, 
it's like having a mortgage that's 9 times their annual income. And 
that mortgage doesn't even come with a house! This burden is outpacing 
the net worth of most Americans and the growth rate of our economy. 

The second deficit is our savings deficit. The savings rate among U.S. 
consumers has been falling for some time. In 2005, for the first time 
since 1933, the annual personal savings rate in this country reached 
negative territory. The savings deficit was even greater in 2006. We've 
returned to savings levels not seen since the depths of the Great 
Depression. In fact, America has among the lowest overall savings rates 
of any major industrialized nation. 

Clearly, many Americans, like their federal government, are living 
beyond their means. This trend is particularly alarming in an aging 
society like ours. Obviously, those people who save more will live 
better in retirement. And given the problems plaguing our public and 
private retirement systems, personal investments will be even more 
critical to your retirement planning. 

So if we aren't saving here at home, who's been underwriting our recent 
national spending spree? The answer is foreign players. And that brings 
me to America's third deficit: our balance-of-payments deficit. America 
is simply spending more than it's producing. As you've probably learned 
in economics classes here at the Academy, large government deficits 
translate into large trade deficits as well as a weakened dollar. So, 
it shouldn't surprise you that in 2006, our trade deficit hit a record 
$763 billion and the value of the dollar has in fact declined. 

While our own savings rates have plummeted, overseas savings rates have 
not. Overseas money has been pouring into the United States. Thanks to 
the high savings rates in China, Japan, Korea, and elsewhere, it's been 
relatively cheap for Americans to borrow. But there's a catch, and it's 
a big one. Increasingly, we're eating our seed corn and mortgaging our 
future. Furthermore, some of our leading lenders may not share our long-
term national interests. Imagine what would happen to interest rates if 
some of these investors suddenly cut back on their appetite for U.S. 
Treasury notes. 

Finally, there's America's leadership deficit, which is probably the 
most serious and sobering of all. At both ends of Pennsylvania Avenue 
and on both sides of the political aisle, we need leaders who will face 
the facts, speak the truth, work together, and make tough choices. We 
also need leadership from our state capitols and city halls, from 
businesses, colleges and universities, charities, think tanks, the 
military, and the media. So far, there have been too few calls for 
fundamental change and shared sacrifice. 

Back in 1966, discretionary spending, which includes defense, 
represented two-thirds of federal spending. Last year, it was 38 
percent and declining. In 1966, defense represented 43 percent of the 
total federal spending. Last year, it was 20 percent, including the 
current costs for our operations in Iraq and Afghanistan. [See slide 
#1, page 13] 

Long-range simulations from my agency, the U.S. Government 
Accountability Office (GAO), are chilling. Just six years ago, we were 
on a path of fiscal sustainability for well over 40 years. [See slide 
#2, page 14]. Today, based on reasonable assumptions, GAO's simulation 
model suggests that we will face major economic challenges well before 
that time. In fact, the simulation model crashes in a little over 40 
years. [See slide #3, page 15]. 

If we continue as we have, policymakers will eventually have to raise 
taxes significantly or slash government services the American people 
depend on and take for granted. Just pick a program--student loans, the 
interstate highway system, our national parks, federal law enforcement 
programs, and even our armed forces. 

The meaning is clear: a crunch is coming. Looking ahead, unless we 
change course, all federal departments, including the Navy, will face 
increasing budget pressures. No agency or program can or should count 
on receiving a blank check with little or no questions asked--even in a 
time of "war." 

We simply cannot make decisions on national security without 
reexamining and transforming our military and defense operations in 
light of 21st century realities. This requires long-term planning, 
improved internal controls, and added emphasis on transparency and 
accountability--particularly when it comes to defense acquisitions and 
contracting. As Pentagon budgets begin to flatten, there will be 
increasing pressure to make better use of appropriated funds. Spending 
more money is not always the answer. The real question is, how can we 
spend our money more efficiently and wisely to achieve the desired 
outcomes? [See slide #4, page 16]. 

Defense Transformation: 

Most of you here are just beginning your careers in the Navy. But as 
Navy and Marine Corps officers, some of you will be senior military or 
civilian leaders in the future. For your generation, squeezed budgets 
are going to be a fact of life. It won't be easy, but here are some 
thoughts on how to deal with this emerging reality. 

Right now, some parts of the defense budget, especially military health 
care costs, are out of control. This simply isn't sustainable. 

Defense transformation can help ensure a more positive future. What do 
I mean by defense transformation? In a nutshell, I'm taking about a 
Defense Department that maximizes value and mitigates risk in 
connection with real national security threats within current and 
expected resource levels. 

I've said this before, and I'll say it again: We have the best military 
forces on earth. No one else is even close. 

However, when it comes to economy, efficiency, transparency, and 
accountability, it's a very different story. If I were giving out 
grades, the Defense Department would get a "D" on the business side. 
Why? Simply put, the Defense Department wastes billions of dollars 
every year that could be used to boost readiness, improve the quality 
of life of our military, and mitigate new and emerging security 
threats. 

Unlike fraud and abuse, waste doesn't necessarily involve a violation 
of the law. It's more about getting poor value for the money, usually 
because of mismanagement, poor judgment, inappropriate directions, a 
failure to act, or weak oversight. 

GAO regularly updates its High-Risk List of government areas that are 
especially vulnerable to waste, fraud, abuse, and mismanagement or in 
need of fundamental transformation. In January, we issued our latest 
High-Risk List, which flags 27 key trouble spots across government. 
These areas range from federal oversight of food safety, to 
modernization of the air traffic control system, to a range of defense 
related issues. Over the years, GAO has removed several areas from the 
list. Unfortunately, a number of areas have been on the list since GAO 
first issued it back in 1990. 

Significantly, the Defense Department continues to dominate GAO's High- 
Risk List. DOD directly or indirectly owns 15 of the 27 high-risk 
areas. Many of them involve basic business processes, including 
contracting, financial management, weapons acquisition, and human 
capital strategy. This last issue--human capital--is extremely 
important. After all, any organization, including the military, is only 
as good as its people. 

Let's face it, if the military can't reliably attract, motivate, and 
retain a high-quality workforce, nothing else matters. After all, its 
not just superior equipment or technology that gives us the edge on the 
battlefield. It's the people who represent our nation's "total force" 
that are our real competitive advantage. At DOD, this includes not just 
military personnel but also civilian employees and contractors. 

When it comes to the war on terrorism, the President has asked our 
forces to do a job, and they've done it with courage and conviction. 
Notwithstanding their noble efforts, our military has sustained more 
than 3,000 deaths and over 20,000 wounded. We're also seeing 
significant wear and tear on our military equipment and growing 
replacement costs. The stress and strain on American forces and 
equipment has reduced our overall readiness and the availability of 
reserve personnel. 

The Navy and the other services face growing personnel challenges. 
Given the many demands now being placed on our armed forces, concerns 
have been raised about our state of readiness, the long-term viability 
of our all-volunteer force, and the sustainability of the current 
business model for the guard and reserves. The increasing demands have 
also caused the government to use military personnel and contractors-- 
particularly in Iraq--in unprecedented ways, some of which may not make 
sense. The time has come to review and reconsider the role of 
contractors and how best to contract with, compensate, and oversee 
them. 

As future budgets tighten, DOD will need to get leaner organizationally 
and work smarter and faster operationally. In many cases, this will 
require a fundamental rethinking of how the Pentagon is organized and 
does business. Transforming basic processes and procedures, flattening 
organizations, cracking hardened silos, and transcending cultural 
barriers will be essential, not just for DOD but for the entire federal 
government. 

One key area DOD needs to overhaul is its acquisitions process. The 
sheer cost of new weapons on the drawing board and in production is 
breathtaking. DOD is now in the midst of a vast effort to modernize and 
transform its military operations and platforms. DOD currently has 
plans to invest nearly $1.5 trillion in new weapons systems. 

As we all know, cost overruns on military contracts are nothing new. 
But what's so alarming today is the frequency and magnitude of cost 
overruns. Some major projects are as much as 50 percent over budget and 
years behind schedule. 

In this environment, even modest cost overruns can be incredibly 
expensive. For example, let's assume there's 10 percent cost growth on 
the Pentagon's planned investment budget for new weapons. While 10 
percent cost growth may be a somewhat conservative estimate, on $1.5 
trillion, it represents an additional $150 billion. 

So what does $150 billion buy you? With $150 billion, we could run the 
Department of Justice, including the FBI and the entire federal prison 
system, for the next six years. With $150 billion, we could fund the 
Head Start program for 22 years. With $150 billion, we could have paid 
for the entire Apollo space program and still had money left over. 

Alternatively, $150 billion would buy the military another 1,700 F-18 
Super Hornets, or 300 littoral combat ships, or about 60 Virginia-class 
submarines. Put another way, all active duty personnel in the Navy, 
including midshipmen, could get a onetime bonus of $437,000. Don't get 
excited, that bonus is theoretical, not reality. 

Sometimes, the Pentagon buys what some want rather than what we need. 
For example, some weapons are critical to achieving the military's 
objectives. But others are more of a wish list of the latest and 
greatest technology. And as budgets grow tighter, the military is going 
to have to distinguish unlimited wants from true needs based on 
credible current and future threats. In addition, DOD will also have to 
consider which platforms and initiatives are both affordable and 
sustainable over time. Candidly, Congress sometimes contributes to 
these dual challenges through earmarks or other actions. As a result, 
many parties need to change their behavior as we move forward to create 
a better future. 

All too frequently, the Pentagon rushes into the production of weapons 
systems with unproven technology. Time and again, we've seen this risky 
strategy backfire, with the military forced to retrofit planes, tanks, 
and ships at great expense. This results in wasted money that could 
have been used to meet real needs. 

All too often, government workers aren't held accountable for unethical 
or unsuccessful actions. Similarly, contractors rarely pay a price for 
poor outcomes. In fact, they sometimes get rewarded. For example, 
contractors on the F-22 A fighter jet received more than 90 percent of 
eligible performance bonuses despite being way over budget and behind 
schedule. Bonuses like this don't pass the straight face test and must 
stop. 

Weak program management and inadequate oversight have contributed to 
the problem. Too often, military officials have too little authority 
over specific weapon systems. There's also been frequent turnover among 
key program managers. Furthermore, a recent GAO report found that the 
Pentagon now has 40 percent fewer staff devoted to weapons acquisition 
and oversight than it did in 1989. 

Currently, there's too little coordination among the armed forces when 
it comes to planning, budgeting, and execution. Candidly, the program 
planning and acquisition processes haven't caught up with the 
military's joint, or purple, approach to fighting wars. 

The truth is, costly Cold War weapons often don't work as well against 
the type of asymmetric threats we're seeing in Iraq and Afghanistan. 
When you're dealing with IEDs, snipers, and suicide bombers, you need 
equipment like body armor and heavily reinforced vehicles. 
Unfortunately, this isn't necessarily where the taxpayers' money has 
been going. 

Changing how the military does business will require a difficult 
cultural transformation and a number of basic organizational and 
operational changes. Much of government today is too hierarchical, 
process oriented, siloed, and self-absorbed. Government must become 
flatter, more results focused, more partnership oriented, and more 
externally aware. Frankly, we faced this challenge at GAO, and we 
addressed it head on and with success. 

I think several major, complex, and challenged federal agencies would 
benefit greatly from having a person on point to help lead the overall 
business transformation efforts. Lately, I've been urging the 
establishment of a chief management officer (CMO) at selected major 
federal departments, including DOD. This individual could help 
introduce a more strategic and integrated approach to key business 
transformation challenges. 

And I want to make a key point here: Throughout the government, 
including the military, there's far too little accountability for 
mismanagement and poor judgment. The outrageous situation at Walter 
Reed brought this point home in very human terms. To treat our 
returning heroes this way is simply a disgrace. Candidly, the type of 
accountability that we are now seeing in connection with Walter Reed is 
a rare exception rather than the rule. 

But it's also important to hold DOD accountable on other measures, 
particularly efficiency and effectiveness. It's not acceptable to pay 
for something that's not delivered. It's not acceptable when you don't 
get what you've been promised. It's not acceptable to spend funds 
without regard to price or value. It's not acceptable to duplicate 
projects that are being undertaken elsewhere within the same 
department. 

Average citizens should have confidence that their taxpayer dollars are 
being spent wisely. Wasted funds not only undermine our ability to meet 
real needs. Wasted funds also undermine public trust and confidence in 
government. 

At DOD, greater accountability requires a fundamental cultural 
transformation that's based on two-way communication and continuous 
improvement. After all, you can learn a lot by listening. That doesn't 
mean you should just follow popular opinion. As President Harry Truman 
once asked, "How far would Moses have gone if he had taken a poll in 
Egypt?" Nonetheless, I think the Navy and the other services would 
benefit from more feedback from all levels. 

In the final analysis, defense transformation depends on having a 
compelling vision coupled with strong and sustained leadership. It also 
requires employing a more strategic, forward-looking, integrated, and 
results-oriented approach to addressing a range of current and emerging 
military challenges within current and expected resource levels. At DOD 
and elsewhere in government, bad habits can be overcome. But it's going 
to take a concerted effort by many players over many years before we 
can achieve real and sustainable success. 

A Fiscal Way Forward: 

Beyond defense transformation, our nation needs to take steps to return 
us to a more prudent and sustainable fiscal path. By nature, I'm an 
optimist and a person of action. I don't believe in simply stating a 
problem. I also think it's important to state a possible way forward: 

In my view, the first order of business should be to state the facts 
and speak the truth to the American people. For starters, Washington 
needs to improve transparency in its financial reporting and budgeting 
practices. As the federal official who signs the audit report on the 
government's financial statements, I'm here to tell you our 
government's financial condition is worse than advertised. 

Current federal financial reporting and budgeting provides policymakers 
and the public with an incomplete and even a misleading picture. A lot 
of press coverage focuses on year-to-year deficit numbers. And as I 
mentioned earlier, no matter which number you pick, our current and 
projected deficit levels are both big and bad. 

We've all heard the rhetoric. We'll be just fine if we can just get rid 
of congressional earmarks, foreign aid, or NASA missions back to the 
moon and on to Mars. Similar arguments are being made for eliminating 
the 2001 and 2003 tax cuts. But candidly, these actions won't get the 
job done. In fact, even shutting down the entire Department of Defense 
wouldn't come close to closing our long-range fiscal gap. 

We aren't going to close our fiscal gap through strong economic growth, 
massive spending cuts, or huge tax increases. The gap is simply too 
great, and the math and politics just don't work. 

It's essential that we impose meaningful budget controls on both the 
tax and the spending sides of the ledger. These controls should apply 
to both discretionary and mandatory spending. Additional reforms are 
needed in connection with congressional earmarks, emergency 
appropriations, and supplemental spending. 

Members of Congress need more explicit information on the long-term 
costs of spending and tax bills--before they vote on them. The Medicare 
prescription drug benefit passed in 2003 is one of the most expensive 
government entitlement programs of all time. It's also a glaring 
example of what's wrong with the current legislative process. The 
Medicare prescription drug bill came with an $8 trillion price tag, but 
that fact wasn't disclosed until after the bill was passed and signed 
into law. 

We also need to reconsider the current scope and structure of the 
federal government. Today, about 62 percent of federal spending and 
most tax preferences are on autopilot and based on conditions that 
existed before most of you were born. I'm talking about conditions 
dating back to when Harry Truman, Dwight Eisenhower, and John Kennedy 
were in the White House. 

Once federal programs or agencies are created, the tendency is to fund 
them in perpetuity, regardless of changing needs and circumstances. 
This is what I mean when I say our government is on autopilot. 
Washington rarely seems to question the wisdom of its existing programs 
and politics. We simply add new programs and initiatives on top of the 
old ones. As President Ronald Reagan once quipped, a government program 
is "the nearest thing to eternal life we'll ever see on this earth." 
This is a key reason our government has grown so large and is so 
expensive. 

American families regularly clean out their closets and attics. Surplus 
items are either sold at yard sales or given to charity. Unfortunately, 
when it comes to federal programs and policies, our government has 
never undertaken an equivalent spring cleaning. When our government 
does finally do a spring cleaning, I wouldn't recommend following the 
Pentagon's lead. GAO reports have found that DOD has a problem with 
selling existing inventory for pennies on the dollar while buying more 
of the same items at full price. 

We need nothing less than a top-to-bottom review of federal programs 
and policies. Congress and the President need to decide which of these 
activities remain priorities, which should be overhauled, and which 
have simply outlived their usefulness. 

Entitlement reform is especially urgent. Unless we reform Social 
Security, Medicare, and Medicaid, these programs will eventually crowd 
out all other federal spending, including defense. Based on historical 
federal tax levels, by 2040 our government could be doing little more 
than sending out Social Security checks and paying interest on our 
massive national debt. 

Fortunately, concern is growing. Members of Congress on both sides of 
the aisle have started asking some pointed questions about where we are 
and where we're headed. Even the Administration now acknowledges that 
deficits matter. In recent statements, the President has pledged not 
just to balance the unified budget by 2012 but also to start tackling 
our large and growing unfunded entitlement promises. 

To get things moving, a capable and credible bipartisan commission 
could address Social Security, tax policy, health care, budget reforms, 
and other key areas. Such a commission would be well positioned to send 
the President and Congress a balanced package of reforms that could 
lead to legislation. I'm not talking about reinventing the wheel. 
Instead, the commission could draw on the work of earlier commissions, 
existing groups, and prominent individuals. The commission could be 
created statutorily. Or, alternatively, such a commission could be 
independent of the political process. At a minimum, the commission's 
efforts would spur more informed debate going into the 2008 election 
cycle. 

Citizen Education and Engagement: 

Citizen education and public engagement are also essential. The 
American people need to become more informed and involved when it comes 
to the problems facing our country. They also need to become more vocal 
in demanding change. Younger Americans like you need to speak up 
because you and your children will ultimately pay the price and bear 
the burden if today's leaders fail to act. 

The good news is younger Americans turned out in large numbers for 
November's mid-term election. From Iraq to immigration, from ethical 
lapses to management failures and fiscal irresponsibility, the public's 
dissatisfaction with the status quo was abundantly clear. But looking 
toward 2008, it's essential that the public and the press hold 
candidates accountable for their position on our large and growing 
fiscal and other sustainability challenges. 

This is why I and others have been speaking out publicly about our 
nation's worsening financial condition and long-term fiscal outlook. 
Beginning in the fall of 2005, I started going on the road with 
representatives of the Concord Coalition, the Brookings Institution, 
and the Heritage Foundation as part of a "Fiscal Wake-up Tour." So far, 
we've held town-hall meetings at colleges and universities and other 
public venues in 19 cities across the country. Depending upon which 
panel discussion you choose to join later today, you may be hearing 
from some of these other tour participants. 

During the tour, I've found that the American people are hungry for two 
things: truth and leadership. The folks on Main Street are tired of 
spin. They just want some straight talk about what's going on and 
they're looking for results not rhetoric. They also want public 
officials with the courage to lead change and who are willing to 
partner with others on a bipartisan basis to solve problems. 

On this score, it doesn't matter whether you're a Democrat, a 
Republican, or an Independent. The problems I've been describing aren't 
partisan in nature, and the solutions won't be either. We need ideas 
and proposals that will appeal to the "sensible center" rather than the 
"ideological extremes" on the left and the right. 

In my view, successful leadership today requires several attributes, 
including courage, integrity, and creativity. We need leaders with the 
courage to speak the truth and do the right thing, even if it isn't 
easy or popular. We need leaders who have the integrity to lead by 
example and practice what they preach. Leaders who do what's right 
rather than what's merely permissible under the law. We also need 
leaders who are creative people, who can see new ways to solve old 
problems, who will partner for progress, and who can help others see 
the way forward. 

A commitment to stewardship is also essential. Successful leaders also 
need to take a long-term view. We've had a tradition in this country of 
trying to leave things not just better off but better positioned for 
future generations. The people who built our great country and this 
magnificent institution understood that. It's called stewardship. More 
leaders today need to realize that we can't just live for the day. We 
also need to prepare for a better tomorrow. 

Three countries with challenges similar to ours--Australia, Canada, and 
New Zealand--have had the courage to make tough choices. Like the 
United States, they have aging populations. Unlike the United States, 
these three countries have stepped up to the plate and dealt with some 
of their long-term challenges. Among other things, they've reformed 
their social insurance programs. The efforts by policymakers in these 
three countries show that it is politically possible to make difficult 
decisions that require short-term pain in the interest of long-term 
gain. 

America is a great nation, probably the greatest in history. But if we 
want to stay great, we have to face facts, recognize reality, heed the 
lessons of history, and make needed changes. I think there are some 
important parallels between American's current situation and another 
great power from the past: Rome. The Roman Empire lasted a thousand 
years, but only about half that time as a republic. The Roman Republic 
fell for many reasons, but three reasons are worth remembering: 
declining moral values and political civility at home, an overconfident 
and overextended military in distant lands, and fiscal irresponsibility 
by the central government. Sound familiar? In my view, it's time we 
learned from history and took steps to ensure the American Republic 
stands the test of time. 

Please don't misunderstand my message this morning. Things are far from 
hopeless. Yes, it's going to take some tough choices on a range of 
important issues. But I'm convinced America can and ultimately will 
rise to the challenge, just as we did during World War II and other 
difficult times in our past. Meaningful action can put us on the path 
toward a more positive future, one with higher economic growth, 
reasonable tax levels, a strong defense, sustainable social insurance 
programs, greater confidence in government at home, and greater respect 
for America abroad. 

President Bush still has time to step up to the plate and address our 
fiscal and other sustainability challenges. But it's imperative the 
next President, whoever he or she may be and whichever party he or she 
represents, needs to use the "bully pulpit" of the Oval Office to push 
needed reforms. If this happens, we have a real chance to turn things 
around, save our future, and keep America great. 

In the case of the United States, effective leadership--the kind that 
leads to meaningful and lasting change--has to be broad-based. It must 
come from the White House and Capitol Hill and it must be bipartisan. 
But before that will happen, the three most powerful words in our 
Constitution--"we the people"--need to come alive. The American people 
need to take more interest in our fiscal challenge. And they need to 
make their views known as we head toward the 2008 elections. 

In closing, one of my favorite presidents, Theodore Roosevelt, firmly 
believed that it was every American's responsibility to be active in 
our civic life. Democracy is hard work, but its work worth doing. As TR 
once said, "fighting for the right [cause] is the noblest sport the 
world affords." I hope that you'll join me in leading by example and 
trying to make a positive and lasting difference not just for today, 
but also for tomorrow. 

Thanks for your attention this morning, and thanks again for your 
commitment to serve our country. May God bless you, this institution, 
and the United States of America. And now, I'd be happy to answer your 
questions. 

Composition of Federal Spending: 

[See PDF for image] - graphic text 
	
3 pie charts with 5 items each. 

1966: 
Defense: 43.0%; 
Social Security: 15.0%; 
Medicare & Medicaid: 1.0%; 
Net interest: 7.0%; 
All other spending: 34.0%. 

1986: 
Defense: 28.0%; 
Social Security: 20.0%; 
Medicare & Medicaid: 10.0%; 
Net interest: 14.0%; 
All other spending: 29.0%. 

2006: 
Defense: 20.0%; 
Social Security: 21.0%; 
Medicare & Medicaid: 19.0%; 
Net interest: 9.0%; 
All other spending: 32.0%. 

Source: Office of Management and Budget. 

Note: Numbers may not ass to 100 percent due to rounding. 

[End of figure] 

Potential Fiscal Outcomes under Baseline Extended (January 2001): 
Revenues and Composition of Spending as a Share of GDP: 

[See PDF for image] - graphic text: 
	
Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 		

2005; 
Net interest: 0.8%; 
Social Security: 4.3%; 
Medicare & Medicaid: 3.7%; 
All other spending: 8.0%; 
Revenue: 20.3%. 

2015[A]; 
Net interest: 0%; 
Social Security: 5.1%; 
Medicare & Medicaid: 4.9%; 
All other spending: 5.6%; 
Revenue: 20.4%. 

2030[A]; 
Net interest: 0%; 
Social Security: 6.6%; 
Medicare & Medicaid: 9.4%; 
All other spending: 4.0%; 
Revenue: 20.4%. 

2040[A]; 
Net interest: 0%; 
Social Security: 6.7%; 
Medicare & Medicaid: 9.0%; 
All other spending: 4.4%; 
Revenue: 20.4%.

Source: GAO's January 2001 analysis. 

Notes: Revenue as a share of GDP increases through 2011 due to (1) real 
bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) 
increased revenue from tax-deferred retirement accounts. After 2011, 
revenue as a share of GDP is held constant--implicitly assuming action 
to offset the increased revenue from real brackets creep, the AMT, and 
tax-deferred retirement accounts. 

[A] All other spending is net of offsetting interest receipts. 

[End of Figure] 

Potential Fiscal Outcomes: Alternative Simulation--Discretionary 
Spending Grows with GDP and Expiring Tax Provisions Extended (January 
2007): Revenues and Composition of Spending as a Share of GDP: 

[See PDF for image] - graphic text: 
	
Line/Stacked Bar combo chart with 4 groups, 1 line (Revenue) and 4 bars 
per group. 	

2006; 
Net interest: 1.7%; 
Social Security: 4.2%; 
Medicare & Medicaid: 3.9%; 
All other spending: 10.5%; 
Revenue: 18.4%. 

2015; 
Net interest: 1.3%; 
Social Security: 4.6%; 
Medicare & Medicaid: 4.9%; 
All other spending: 8.0%; 
Revenue: 19.9%. 

2030; 
Net interest: 1.3%; 
Social Security: 6.5%; 
Medicare & Medicaid: 8.3%; 
All other spending: 7.8%; 
Revenue: 20.1%. 

2040; 
Net interest: 3.5%; 
Social Security: 7.0%; 
Medicare & Medicaid: 10.3%; 
All other spending: 7.8%; 
Revenue: 20.1%.

Source: GAO's January 2007 analysis. 

Notes: AMT exemption amount is retained at the 2006 level through 2017 
and expiring tax provisions are extended. After 2017, revenue as a 
share of GDP is held constant--implicitly assuming that action is taken 
to offset increased revenue from real bracket creep, the AMT, and tax-
deferred retirement accounts. 

[End of Figure] 

Federal Spending as a Share of GDP 1962-2006: 

[See PDF for Image] - graphic text: 

Year: 1962; 
National Defense: 9.22%; 
Social Security, Medicare, and Medicaid: 2.55%; 
Other Non-Defense Spending: 7.05%. 

Year: 1963; 
National Defense: 8.92%; 
Social Security, Medicare, and Medicaid: 2.66%; 
Other Non-Defense Spending: 7.01%. 

Year: 1964; 
National Defense: 8.55%; 
Social Security, Medicare, and Medicaid: 2.63%; 
Other Non-Defense Spending: 7.33%. 

Year: 1965; 
National Defense: 7.37%; 
Social Security, Medicare, and Medicaid: 2.58%; 
Other Non-Defense Spending: 7.26%. 

Year: 1966; 
National Defense: 7.72%; 
Social Security, Medicare, and Medicaid: 2.86%; 
Other Non-Defense Spending: 7.29%. 

Year: 1967; 
National Defense: 8.80%; 
Social Security, Medicare, and Medicaid: 3.16%; 
Other Non-Defense Spending: 7.44%. 

Year: 1968; 
National Defense: 9.45%; 
Social Security, Medicare, and Medicaid: 3.50%; 
Other Non-Defense Spending: 7.60%. 

Year: 1969; 
National Defense: 8.70%; 
Social Security, Medicare, and Medicaid: 3.72%; 
Other Non-Defense Spending: 6.94%. 

Year: 1970; 
National Defense: 8.07%; 
Social Security, Medicare, and Medicaid: 3.87%; 
Other Non-Defense Spending: 7.39%. 

Year: 1971; 
National Defense: 7.30%; 
Social Security, Medicare, and Medicaid: 4.25%; 
Other Non-Defense Spending: 7.91%. 

Year: 1972; 
National Defense: 6.72%; 
Social Security, Medicare, and Medicaid: 4.43%; 
Other Non-Defense Spending: 8.43%. 

Year: 1973; 
National Defense: 5.86%; 
Social Security, Medicare, and Medicaid: 4.72%; 
Other Non-Defense Spending: 8.21%. 

Year: 1974; 
National Defense: 5.51%; 
Social Security, Medicare, and Medicaid: 5.00%; 
Other Non-Defense Spending: 8.25%. 

Year: 1975; 
National Defense: 5.54%; 
Social Security, Medicare, and Medicaid: 5.41%; 
Other Non-Defense Spending: 10.35%. 

Year: 1976; 
National Defense: 5.16%; 
Social Security, Medicare, and Medicaid: 5.66%; 
Other Non-Defense Spending: 10.59%. 

Year: 1977; 
National Defense: 4.93%; 
Social Security, Medicare, and Medicaid: 5.79%; 
Other Non-Defense Spending: 10.01%. 

Year: 1978; 
National Defense: 4.71%; 
Social Security, Medicare, and Medicaid: 5.74%; 
Other Non-Defense Spending: 10.24%. 

Year: 1979; 
National Defense: 4.65%; 
Social Security, Medicare, and Medicaid: 5.72%; 
Other Non-Defense Spending: 9.79%. 

Year: 1980; 
National Defense: 4.91%; 
Social Security, Medicare, and Medicaid: 6.04%; 
Other Non-Defense Spending: 10.72%. 

Year: 1981; 
National Defense: 5.16%; 
Social Security, Medicare, and Medicaid: 6.40%; 
Other Non-Defense Spending: 10.65%. 

Year: 1982; 
National Defense: 5.74%; 
Social Security, Medicare, and Medicaid: 6.81%; 
Other Non-Defense Spending: 10.55%. 

Year: 1983; 
National Defense: 6.10%; 
Social Security, Medicare, and Medicaid: 7.04%; 
Other Non-Defense Spending: 10.35%. 

Year: 1984; 
National Defense: 5.92%; 
Social Security, Medicare, and Medicaid: 6.66%; 
Other Non-Defense Spending: 9.60%. 

Year: 1985; 
National Defense: 6.10%; 
Social Security, Medicare, and Medicaid: 6.69%; 
Other Non-Defense Spending: 10.06%. 

Year: 1986; 
National Defense: 6.20%; 
Social Security, Medicare, and Medicaid: 6.66%; 
Other Non-Defense Spending: 9.59%. 

Year: 1987; 
National Defense: 6.10%; 
Social Security, Medicare, and Medicaid: 6.67%; 
Other Non-Defense Spending: 8.87%. 

Year: 1988; 
National Defense: 5.80%; 
Social Security, Medicare, and Medicaid: 6.56%; 
Other Non-Defense Spending: 8.89%. 

Year: 1989; 
National Defense: 5.62%; 
Social Security, Medicare, and Medicaid: 6.52%; 
Other Non-Defense Spending: 9.04%. 

Year: 1990; 
National Defense: 5.22%; 
Social Security, Medicare, and Medicaid: 6.76%; 
Other Non-Defense Spending: 9.87%. 

Year: 1991; 
National Defense: 4.61%; 
Social Security, Medicare, and Medicaid: 7.18%; 
Other Non-Defense Spending: 10.53%. 

Year: 1992; 
National Defense: 4.78%; 
Social Security, Medicare, and Medicaid: 7.60%; 
Other Non-Defense Spending: 9.76%. 

Year: 1993; 
National Defense: 4.43%; 
Social Security, Medicare, and Medicaid: 7.77%; 
Other Non-Defense Spending: 9.24%. 

Year: 1994; 
National Defense: 4.05%; 
Social Security, Medicare, and Medicaid: 7.85%; 
Other Non-Defense Spending: 9.11%. 

Year: 1995; 
National Defense: 3.71%; 
Social Security, Medicare, and Medicaid: 7.98%; 
Other Non-Defense Spending: 9.00%. 

Year: 1996; 
National Defense: 3.45%; 
Social Security, Medicare, and Medicaid: 8.01%; 
Other Non-Defense Spending: 8.83%. 

Year: 1997; 
National Defense: 3.31%; 
Social Security, Medicare, and Medicaid: 7.95%; 
Other Non-Defense Spending: 8.31%. 

Year: 1998; 
National Defense: 3.11%; 
Social Security, Medicare, and Medicaid: 7.80%; 
Other Non-Defense Spending: 8.24%. 

Year: 1999; 
National Defense: 3.01%; 
Social Security, Medicare, and Medicaid: 7.55%; 
Other Non-Defense Spending: 8.10%. 

Year: 2000; 
National Defense: 3.03%; 
Social Security, Medicare, and Medicaid: 7.46%; 
Other Non-Defense Spending: 7.93%. 

Year: 2001; 
National Defense: 3.03%; 
Social Security, Medicare, and Medicaid: 7.75%; 
Other Non-Defense Spending: 7.74%. 

Year: 2002; 
National Defense: 3.36%; 
Social Security, Medicare, and Medicaid: 8.04%; 
Other Non-Defense Spending: 7.98%. 

Year: 2003; 
National Defense: 3.75%; 
Social Security, Medicare, and Medicaid: 8.19%; 
Other Non-Defense Spending: 8.05%. 

Year: 2004; 
National Defense: 3.96%; 
Social Security, Medicare, and Medicaid: 8.17%; 
Other Non-Defense Spending: 7.78%. 

Year: 2005; 
National Defense: 4.04%; 
Social Security, Medicare, and Medicaid: 8.18%; 
Other Non-Defense Spending: 7.93%. 

Year: 2006; 
National Defense: 4.00%; 
Social Security, Medicare, and Medicaid: 8.11%; 
Other Non-Defense Spending: 8.23%. 

Source: OMB. 

[End of figure] 

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