Fiscal Stewardship and Defense Transformation

GAO-07-600CG: Published: Mar 8, 2007. Publicly Released: Mar 8, 2007.

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This speech was given by the Comptroller General before the United States Naval Academy's National Security Economics Seminar in Annapolis, MD, on March 8, 2007. 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 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. America's third deficit is our balance-of-payments deficit. America is simply spending more than it's producing. 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. 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. 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 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.

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. 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. Clearly, many Americans, like their federal government, are living beyond their means. This trend is particularly alarming in an aging society like ours. And given the problems plaguing our public and private retirement systems, personal investments will be even more critical to your retirement planning. 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. Imagine what would happen to interest rates if some of these investors suddenly cut back on their appetite for U.S. Treasury notes. Just six years ago, we were on a path of fiscal sustainability for well over 40 years. Today, based on reasonable assumptions, GAO's simulation model suggests that we will face major economic challenges well before that time. 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. Looking ahead, unless we change course, all federal departments, including the Navy, will face increasing budget pressures. If I were giving out grades, the Defense Department would get a "D" on the business side. 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. 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. 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. As future budgets tighten, DOD will need to get leaner organizationally and work smarter and faster operationally. Weak program management and inadequate oversight have contributed to the problem. At DOD, greater accountability requires a fundamental cultural transformation that's based on two-way communication and continuous improvement. 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. 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.

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