April 23, 2014

Alarming Long-Term Fiscal Projections in GAO Report

The Government Accountability Office (GAO) recently issued its fall report on the federal government’s long-term fiscal outlook, providing two basic scenarios for policymakers to consider: a "baseline extended simulation" and an "alternative simulation" that relies on spending and revenue assumptions that The Concord Coalition considers more realistic. (See below for details of the GAO's simulations.)

The report underscores the serious problems our country faces if it continues on its current fiscal path. Some of the projections in the alternative simulation illustrate just how serious those problems are likely to be:

  • 2022 -- Net interest costs would exceed Medicare.
  • 2026 -- Federal debt held by the public would exceed the Gross Domestic Product (GDP).
  • 2026 -- Social Security, Medicare, Medicaid and net interest would consume all government revenues.
  • 2030 -- Net interest costs would exceed Social Security.
  • 2039 -- Debt held by the public would exceed 200 percent of GDP.
  • 2039 -- Net interest would exceed both Medicare and Medicaid.
  • 2041 -- The federal deficit would exceed all government revenues.
  • 2048 -- The deficit would reach 22.6 percent of GDP, more than the entire federal budget in 2008 (22.4 percent of GDP).
  • 2048 -- Federal debt held by the public would equal 300 percent of GDP.
  • 2054 -- Government spending would reach 45.1 percent of GDP, more than twice the size of the budget in 2008 (22.4 percent of GDP).
  • 2055 -- Net interest on the debt would exceed all government revenues.
  • 2057 -- Federal debt held by the public would exceed 400 percent of GDP.
  • 2061 -- Net interest, at 22.6 percent of GDP, would exceed the size of the entire 2008 federal budget.
  • 2064 -- Federal debt held by the public would exceed 500 percent of GDP.

These ominous numbers demonstrate how unsustainable our current path is and how badly corrective action is needed. It’s time for our leaders in Washington to get serious about making the tough choices to put our fiscal house in order.

It is also incumbent on ordinary citizens to recognize how the budget problems affect them, and to put pressure on Washington to address these problems. Waiting will only make the corrective measures more painful. 

The scenario laid out in the GAO report will not actually happen. It couldn't. No one would lend us the money and, in any event, the economy would crash long before debt reached some of the levels shown in these projections. The key question is what steps will be taken, and when, to keep things from reaching a crisis.

 

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GAO'S Explanations of Assumptions Used in Its Simulations

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.