Overview of Fiscal Exposures
GAO’s simulations of the federal government’s long-term fiscal outlook lead to an overarching conclusion: current fiscal policy is unsustainable over the long term. In these simulations, debt held by the public continues to grow over the coming decades as a share of gross domestic product. This growth is driven by a fundamental imbalance between revenue and spending. On the spending side, this imbalance is driven by the effects of an aging population and rising care costs for major federal health and retirement programs such as Medicare and Social Security. Nonetheless, Americans expect continuation of a range of government services and benefits. In budgeting, such expectations are referred to as fiscal exposures—responsibilities, programs, and activities that may legally commit or create the expectation for future federal spending. A more complete understanding of fiscal exposures can help policymakers anticipate changes in future spending and can enhance oversight of federal resources.
As shown below, fiscal exposures have both explicit and implicit characteristics that affect the extent and magnitude of future federal spending. Some programs may have elements of both explicit and implicit exposures.
Spectrum of Fiscal Exposures
Excerpted from GAO-14-28.
Because of variation both in what is known about each exposure and in what can be measured, at times it can be unclear how much spending will arise as a result of these exposures. Further, decision makers may receive misleading signals about the magnitude of some fiscal exposures because the federal budget does not fully reflect the costs for certain types of programs. There are several reasons for this, including the following:
In some instances—such as with credit programs—the methodology for estimating costs seeks to include the long-term exposure. As with all estimates, there is inherent uncertainty related to future events, which means actual costs will differ from experts' current best estimates and such differences may be significant.
In other cases, programs funded through mechanisms such as trust funds may provide misleading signals because the accumulated balances do not necessarily reflect the full future cost of existing government commitments. Further, these balances are not an adequate measure of a fund’s solvency or sustainability. For example, the Highway Trust Fund is the major source of funding for federal surface transportation; however the fund’s revenues are eroding. To maintain authorized spending levels for highway and transit programs and to cover revenue shortfalls, Congress transferred a total of about $63 billion in general revenues to the Highway Trust Fund on six occasions between fiscal years 2008 and 2014. These actions may have created an expectation that the federal government will continue to intervene to shore up the fund. As shown in the figure below, the Congressional Budget Office estimated that $157 billion in additional revenues would be required to maintain current spending levels (plus inflation) between fiscal years 2015 and 2024.
Projected Highway Trust Fund Balance, Fiscal Years 2015 to 2024
Note: This projection assumes no further augmentation of highway-related taxes to the Highway Trust Fund after 2014 from general revenues of other sources. By law, the Highway Trust Fund cannot incur negative balances.
In still other instances—such as with insurance programs—costs reflected in the budget focus on annual cash flows rather than the total estimated cost of these programs to taxpayers.
While the budget reflects payments made to federal civilian and military retirees in the current year, it does not reflect the accrued long-term costs of payments legally owed to future retirees. These costs are explicit fiscal exposures.
Finally, whereas estimates of revenues are included in budget totals, little progress has been made to integrate revenue forgone through tax expenditures—special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates—into the budget presentation. As shown in the following figure, tax expenditures represent a substantial federal commitment.
Tax Expenditures Approach the Size of Discretionary Spending
Excerpted from GAO's Key Issues webpage on Tax Expenditures as of February 2015.
Note: Summing tax expenditure estimates is a useful gauge of size but does not take into account possible interactions among individual tax expenditures.
Related GAO Resources
- Financial Audit: U.S. Government’s Fiscal Years 2014 and 2013 Consolidated Financial Statements (GAO-15-341R)
- Federal Student Loans: Interest Rates Cannot Be Set in Advance to Precisely and Consistently Balance Federal Revenues and Costs (GAO-14-234)
- Fiscal Exposures: Improving Cost Recognition in the Federal Budget (GAO-14-28)
- Highway Trust Fund: All States Received More Funding Than They Contributed in Highway Taxes from 2005 to 2009 (GAO-11-918)
- Flood Insurance: Public Policy Goals Provide a Framework for Reform (GAO-11-670T)
- Airport and Airway Trust Fund: Declining Balance Raises Concerns Over Ability to Meet Future Demands(GAO-11-358T)
- Federal User Fees: Substantive Reviews Needed to Align Port-Related Fees with the Programs They Support (GAO-08-321)
- Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and Uncertainties (GAO-03-213)
- Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions (GAO-01-199SP)
- Tax Expenditure Video: Tax Expenditure Basics (May 2013)
- Key Issues Page: Tax Expenditures