The Nation's Long-Term Fiscal Outlook, August 2007 Update:

Despite Recent Improvement in the Annual Deficit, Federal Fiscal Policy Remains Unsustainable

GAO-07-1261R: Published: Sep 28, 2007. Publicly Released: Sep 28, 2007.

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Since 1992, GAO has published long-term fiscal simulations of what might happen to federal deficits and debt levels under varying policy assumptions. GAO developed its long-term model in response to a bipartisan request from Members of Congress who were concerned about the longterm effects of fiscal policy. GAO's simulations were updated with the CBO's August budget projections and economic assumptions and continue to indicate that the long-term federal fiscal outlook remains unsustainable. This update combined with our analysis of the fiscal outlook of state and local governments demonstrates that the fiscal challenges facing all levels of government are linked and should be considered in a strategic and integrated manner. GAO updates its simulations three times a year as new estimates become available from: CBO's Budget and Economic Outlook (January), Social Security and Medicare Trustees Reports (spring), and CBO's Budget and Economic Outlook: An Update (late summer). This product responds to congressional interest in receiving updated simulation results.

GAO's updated long-term simulations illustrate that despite some improvement in the annual deficit estimate for this fiscal year, the longterm fiscal outlook remains essentially the same and is clearly unsustainable--ever-larger deficits lead to a federal debt burden that ultimately spirals out of control. Two alternative fiscal paths exist. The first is "Baseline Extended," which extends the Congressional Budget Office's (CBO) August baseline estimates beyond the 10-year projection period, and the second is an Alternative based on recent trends and policy preferences. Under these alternative assumptions, discretionary spending grows with the economy during the first 10 years, Medicare physician payments are not reduced as in current law, and revenues are brought to their historical level. Although the timing of deficits and the resulting debt buildup varies depending on the assumptions used, both simulations show that we are on an unsustainable fiscal path.

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