The Federal Government's Long-Term Fiscal Outlook:

Fall 2009 Update

GAO-10-137SP: Published: Oct 15, 2009. Publicly Released: Oct 15, 2009.

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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. We developed our long-term model in response to a bipartisan request from Members of Congress who were concerned about the long-term effects of fiscal policy. GAO runs two simulations: (1) "Baseline Extended" follows the Congressional Budget Office's (CBO) August baseline estimates for the first 10 years and then simply holds revenue and spending other than large entitlement programs constant as a share of gross domestic product (GDP). (2) The "Alternative" simulation is based on historical trends and policy preferences. Discretionary spending grows with GDP rather than inflation during the first 10 years, Medicare physician payment rates are not reduced as in CBO's baseline, all tax provisions are extended to 2019, and beginning with this update, the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2019; revenues are then brought back to their historical level. This update incorporates the most recent projections from the Social Security and Medicare Trustees, and from CBO.

Weaknesses in the economy and financial markets--and the government's response to them--have contributed to near-term increases in federal deficits, which reached a record level in fiscal year 2009. While a lot of attention has been given to the recent fiscal deterioration, the federal government faces even larger fiscal challenges that will persist long after the return of financial stability and economic growth. GAO's simulations continue to show escalating levels of debt that illustrate that the long-term fiscal outlook remains unsustainable. In little over 10 years, debt held by the public as a percent of GDP under our Alternative simulation is projected to exceed the historical high reached in the aftermath of World War II and grow at a steady rate thereafter. These fiscal challenges are driven by health care cost growth and demographic trends. Absent reform, Social Security, Medicare, and Medicaid will account for a growing share of the economy in coming years. The longer action to deal with the nation's long-term fiscal outlook is delayed, the larger the changes will need to be, increasing the likelihood that they will be disruptive and destabilizing.

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