Budget Issues:

Analysis of Long-Term Fiscal Outlook

AIMD/OCE-98-19: Published: Oct 22, 1997. Publicly Released: Oct 22, 1997.

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Paul L. Posner
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Pursuant to a congressional request, GAO updated its previous simulations of the long-term economic impact of federal budget policy following passage of the Balanced Budget Act of 1997.

GAO noted that: (1) the balanced budget or surpluses that are projected in the Balanced Budget Act of 1997 would represent an enormous improvement in the federal government's fiscal position through the next 10 years; (2) the improvements in national saving and reduced debt and interest costs can be expected to produce tangible gains in economic growth and budgetary flexibility over the longer term as well; (3) as a result, the emergence of unsustainable deficits is substantially delayed under recently enacted fiscal policy; (4) if no further action were taken, GAO's simulations indicate that federal spending would grow faster than revenues soon after the baby boom generation begins to retire in 2008; (5) these higher spending levels would be driven would be driven by escalating health and Social Security costs; (6) rising interest costs would compound the deficit problem and take up an increasing share of the federal budget; (7) growing deficits, if unchecked, would eventually result in declining investment and capital stock and, inevitably, falling living standards; (8) over the long term, the "no action" scenario is unsustainable and timely policy action can avoid these economic consequences; (9) while a "no action" simulation is not a forecast of what will happen, it illustrates the nature of future fiscal challenges; (10) the alternative simulations illustrate the potential fiscal and economic benefits of achieving a sustainable budget policy; (11) a fiscal policy of balance through 2050 or extended periods of surplus, for example, could shrink the burden of federal interest costs considerably and also result in a larger economy over the long term; (12) all of these alternative policies would increase per capita GDP in 2050 by more than 35 percent over a "no action" policy, but they would require additional fiscal policy changes; (13) some changes would be difficult to achieve, but over the long term they would strengthen the nation's economy and overall living standards; (14) early action would permit changes in, for example, Social Security or health care benefits, time to adjust; (15) in considering what fiscal adjustments to make, policymakers need to be presented with more complete information on the costs of the government's existing long-term commitments; (16) the budget's current structure and reporting mechanisms have not focused attention on such commitment, nor has the budget process facilitated their explicit consideration; and (17) options to change budget reporting and process to improve recognition of these commitments and prompt early action warrant further exploration.

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