In our most recent work, we used a long-term economic growth model to simulate three of the many possible fiscal paths through the year 2025: a “no action” path that assumed the continuation of fiscal policies in effect at the end of fiscal year 1994; a “muddling through” path that assumed annual deficits of approximately 3 percent of gross domestic product (GDP); and a path that reaches balance in 2002 and sustains it. Spending on interest on our national debt also rises as annual deficits and accumulated public debt expand. Our 1995 simulations also confirm the long-term economic and fiscal benefits of deficit reduction. This means that Americans could enjoy a higher standard of living than they might otherwise experience. Reaching and sustaining balance would also shrink the share of federal spending required to pay interest costs, thereby reducing the long-term programmatic sacrifice necessary to attain deficit reduction targets. Dealing With the Deficit Drivers

The extent to which deficit reduction affects spending on fast-growing programs also matters. Further, our simulations show that even if a balanced budget is achieved early in the next century, deficits would reappear if we fail to contain future growth in health, interest, and social security costs. In conclusion, Mr. Chairman, I would repeat our view that current policy is unsustainable.
Why GAO Did This Study

GAO discussed its work on the budget deficit and long-term economic growth.

What GAO Found

GAO noted that: (1) its long-term simulations show that unless the budget deficit is reduced or eliminated, economic growth, personal incomes, national investment, and the standard of living will be sharply reduced; (2) the nation's present fiscal policy is unsustainable in the long term; (3) reaching and sustaining a balanced budget would reduce federal spending on interest, a fast-growing segment of federal spending; (4) reductions in spending on fast-growing health, social security, and interest costs would be most beneficial and would have the most sustained effects; and (5) foreign governments' deficit reduction efforts have been painful but have provided significant fiscal benefits.