The Federal Government's Long-Term Fiscal Outlook:

Fall 2011 Update

GAO-12-28SP: Published: Oct 24, 2011. Publicly Released: Oct 24, 2011.

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Since 1992, GAO has published long-term fiscal simulations showing federal deficits and debt under different sets of assumptions. GAO developed its long-term model in response to a bipartisan request from members of Congress concerned about the long-term effects of fiscal policy. GAO's simulations provide context for consideration of policy options. They are not intended to suggest particular policy choices but rather to help facilitate a dialogue on this important issue. GAO regularly updates its simulations as new data become available from the Congressional Budget Office (CBO) and the Social Security and Medicare Trustees (Trustees). This update incorporates provisions of the Budget Control Act. As in the past, GAO shows two simulations: The Baseline Extended simulation follows CBO's August 2011 baseline for the first 10 years and then holds revenue and spending other than interest on the debt and large entitlement programs (Social Security, Medicare, and Medicaid) constant as a share of gross domestic product (GDP). Revenue as a share of GDP over the entire period is higher than the historical averages; discretionary spending is below average. In the Alternative simulation, expiring tax provisions other than the temporary Social Security payroll tax reduction are extended to 2021 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2021; revenues are then brought back to the historical average as a share of GDP; discretionary spending follows CBO's baseline for the first 10 years and thereafter gradually increases to the historical average. In both simulations, deficit reduction resulting from provisions in the Budget Control Act related to the Joint Select Committee on Deficit Reduction is applied to total annual deficits evenly from 2013 to 2021. It remains a constant share of GDP thereafter. In Baseline Extended, GAO uses the Trustees' 2011 intermediate projections and CBO's June 2011 long-term projections for Medicaid adjusted to reflect excess cost growth consistent with the Trustees' projections. In the Alternative, major health entitlement programs are based on the Centers for Medicare & Medicaid Services Office of the Actuary's (CMS Actuary) alternative projections that assume reductions in Medicare physician rates do not occur as scheduled under current law and that certain cost containment mechanisms intended to slow the growth of health care cost are not sustained over the long term. We also show the outlook using CBO's long-term projections for Social Security and the major health entitlements; the results are consistent with our other simulations.

The federal government's fiscal outlook has improved since GAO's last report, largely due to provisions in the Budget Control Act of 2011. This Act requires at least $2.1 trillion in deficit reduction from 2012-2021. Nevertheless, GAO's simulations continue to underscore the need to address the longer-term outlook as soon as possible while still recognizing the current weakness in the economy. Rising health care costs and the aging of the U.S. population continue to create budgetary pressure. The oldest members of the baby-boom generation are already eligible for early Social Security retirement benefits and become eligible for Medicare this year. The Social Security program, which historically ran large cash surpluses that helped reduce the need to borrow from the public to finance other programs, is now projected to pay more in benefits than it receives in tax income each year into the future. Budgetary pressure will increase in coming decades as more members of the baby-boom generation retire and become eligible for federal health programs. The timing of the debt buildup varies depending on the assumptions used: debt held by the public increases less rapidly in the Baseline Extended simulation than under the Alternative simulation. However, even with the improvement from the Budget Control Act, debt held by the public under the Alternative simulation exceeds the post-World War II high of 109 percent of GDP by 2027. The Budget Control Act set limits on discretionary spending for fiscal years 2012-2021 and created the Joint Select Committee on Deficit Reduction. Under the enacted discretionary spending limits, discretionary spending as a share of the economy would be lower in 2021 than at any point in the last 40 years. The Act also provides for an additional $1.2 trillion in deficit reduction over the period--either through enactment of recommendations made by the Joint Select Committee or through automatic procedures that would reduce spending. Since the Joint Select Committee may allocate the deficit reduction between changes in tax and spending law as it deems appropriate, savings are applied to the total deficit in the simulations shown in this report. The simulations also assume that the savings as a share of GDP are maintained throughout the simulation period. To do this would require a sustained commitment extending beyond the time horizon and the goals specified in the Budget Control Act. However, based on our simulations even this level of deficit reduction is not sufficient to ensure sustainability.

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