For understandable reasons, the focus in Washington over the past year has been on the nation’s physical health, and its resulting consequences for the near-term economy, rather than on our longer-term fiscal health. A new report by the Government Accountability Office (GAO), however, serves as a timely reminder that the focus will soon need to shift.
In a March 23, 2021 report to Congress and President Biden, Comptroller General of the United States Gene Dodaro, warned:
In the long term, the fiscal outlook poses serious economic, security, and social challenges if not addressed.
Once the pandemic recedes and the economy substantially recovers, Congress and the administration should quickly pivot to developing an approach to place the government on a sustainable long-term fiscal path. Such a plan is needed to ensure that the United States remains in a strong economic position to meet its security and social needs and would preserve the flexibility to address unforeseen events, such as public health emergencies.
The GAO report discusses the federal government’s current fiscal position, including recent changes, the unsustainable long-term outlook, and risks to future fiscal conditions. It also offers a number of recommendations for policymakers and reviews the potential consequences of inaction.
While the deficit and debt spiked in 2020 due to actions taken to combat the COVID-19 pandemic, GAO notes that, “Even prior to the COVID-19 pandemic and resulting economic turmoil, long-term fiscal projections by GAO, by CBO, and in the 2019 Financial Report showed that, absent policy changes, the long-term path of the debt was unsustainable.”
“A failure to address the nation’s unsustainable fiscal path over the long term could make it difficult to maintain the federal government’s credit ratings and attract investors without Treasury paying higher interest rates,” the report states.
The report is based on two simulations. The “baseline extended simulation” follows current law. The “alternative simulation” assumes some changes in current law to reflect “historical policy experiences…such as the extension of tax provisions scheduled to expire.” It also assumes that certain current law provisions designed to control long-term health care costs will not be sustained and that discretionary spending will gradually return to historical levels as a share of GDP (7.3 percent by 2042) from the lower level assumed in the baseline extended simulation (fixed at 5.7 percent of GDP after 2031).
Under both simulations, the debt rises rapidly over the coming years, from 100 percent of GDP this year to 190 percent in the baseline simulation and 224 percent in the alternative simulation by 2051. These results are consistent with CBO’s long-term projections, which show the debt at 202 percent of GDP in 2051 under current law.
GAO’s fiscal diagnosis is a familiar one. Population aging and rising per-capita health care cost are projected to drive spending growth faster than revenue growth. According to GAO, “Despite the elevated levels of spending attributed to federal COVID-19 response in 2020… most of the increase in federal noninterest spending as a share of GDP over the long term is driven by spending on federal health care programs and Social Security.”
Projected deficits would not only accelerate the accumulation of debt but would add significantly to the cost of servicing the debt. Under the alternative simulation, interest costs would top $1 trillion annually by 2033 and rise to nine percent of GDP by 2051.
The magnitude of the changes needed to stabilize the debt are illustrated in a handy (if daunting) table showing how much spending would have to be cut, or taxes raised, to meet a range of debt-to GDP targets within 30 years under the alternative simulation.
For example, if policymakers wanted to keep the debt at 100 percent of GDP, they would need to cut projected spending by 20 percent annually or increase projected revenues annually by 27 percent. A mix of the two would likely be required. Even targeting a debt-to-GDP ratio of 140 percent at the end of 30 years (far exceeding any previous level) would require annual spending cuts of 13.8 percent or annual revenue increases of 18.5 percent, or some mix of the two, from projected levels.
Aside from major policy changes, the GAO notes that its previous work has identified numerous ways in which executive agencies could help improve the fiscal picture. Examples include reducing improper payments, shrinking the gap between taxes owed and taxes paid, and cutting down on duplication and overlap.
Another item that is ripe for reform is the statutory debt limit. At the end of July this year, the debt limit, now temporarily suspended, will spring back to life. If not raised, reformed, or suspended again, it has the potential to cause a damaging default on the nation’s obligations.
As stated in the GAO report, “By limiting the Treasury’s borrowing ability without restraining spending and revenue decisions, the debt limit as currently designed does not limit debt, but it does threaten investors’ confidence that U.S. Treasury securities backed by the full faith and credit of the United States will be honored…Uncertainty over whether the debt limit will be raised or suspended leads to increased borrowing costs and disrupts the market for Treasury securities.”
The GAO’s fiscal health report provides a broad overview of what ails the federal budget. It deserves careful review by lawmakers, administration officials, and the general public. It comes at a particularly relevant time as Congress and the Biden Administration begin to contemplate new and expanded initiatives that could add trillions more to the debt. They are not writing on a clean slate.