Living standards, in turn, would at first stagnate and then fall. This report addresses the outlook for the budget over the longer term. The Balanced Budget Act of 1997, coupled with the strong recent performance of the economy, is expected to extend this recent progress by achieving a balanced budget in 2002 followed by several years of budget surpluses on a unified budget basis. As in our earlier work, a “no action” policy remains unsustainable over the long term. While the federal budget would be in surplus in the first decade of the 21st century, deficits would reemerge in 2012, soon after the baby boom generation begins to retire. Therefore, as we have noted in our past work, the “no action” simulation is not a prediction of what will happen in the future. As Social Security and health spending rise, their share of federal spending grows tremendously. Alternative Fiscal Policies Would Change Long-Term Economic Outcomes

Alternatives to a “no action” policy illustrate the fiscal and economic benefits associated with maintaining a sustainable course. Each of the alternative simulations would require some combination of policy or program changes that reduce spending and/or increase revenues. While consumption would be reduced in the short term, it would be increased over the long term. Early action would permit changes to be phased in and so give those affected by changes in, for example, Social Security or health care benefits, time to adjust. For both the federal government and the economy, any of the three alternative simulations indicates a vast improvement over the “no action” path. Currently, interest spending represents about 15 percent of federal spending, a relatively large share that is a consequence of the deficits of the 1980s and early 1990s. The economic benefits of a sustainable budget policy include increased saving and investment levels and faster economic growth, which results in higher living standards. Figure 9 compares the path of per capita GDP under “no action” to a balanced budget policy. Long-Term Commitments Not Adequately Reflected in Budget Reporting and Process

Long-term economic simulations are a useful tool for examining the balance between the government’s future obligations and expected resources. For example, in a recent report we concluded that supplemental reporting of accrual-based costs of insurance programs would improve recognition of the government’s commitments.Other options to refine the budget process or budget reporting to improve the focus on these commitments and prompt early action to address potential problems can be explored. Nonfederal and federal saving together constitute national saving, which influences private investment and the next period’s capital stock. Interest rate (average on the national debt)
Average effective rate implied by CBO’s interest payment projections through 2006; 5.1% thereafter (CBO’s 2006 implied rate)
Follows CBO’s budget surplus/deficit as a percentage of GAO’s GDP through 2006; GAO simulations thereafter CBO through 2006; increases at the rate of economic growth thereafter CBO through 2006; increases at HCFA’s projected rate thereafter Follows the Social Security Trustees’ Alternative II projections CBO’s assumed levels through 2006; increases at the rate of economic growth thereafter CBO’s assumed levels through 2006; in subsequent years, receipts equal 19.9% of GDP (2006 ratio)
We have made several modifications to the model, but the model’s essential structure remains the same as in our previous work.
Why GAO Did This Study

Pursuant to a congressional request, GAO updated its previous simulations of the long-term economic impact of federal budget policy following passage of the Balanced Budget Act of 1997.

What GAO Found

GAO noted that: (1) the balanced budget or surpluses that are projected in the Balanced Budget Act of 1997 would represent an enormous improvement in the federal government's fiscal position through the next 10 years; (2) the improvements in national saving and reduced debt and interest costs can be expected to produce tangible gains in economic growth and budgetary flexibility over the longer term as well; (3) as a result, the emergence of unsustainable deficits is substantially delayed under recently enacted fiscal policy; (4) if no further action were taken, GAO's simulations indicate that federal spending would grow faster than revenues soon after the baby boom generation begins to retire in 2008; (5) these higher spending levels would be driven would be driven by escalating health and Social Security costs; (6) rising interest costs would compound the deficit problem and take up an increasing share of the federal budget; (7) growing deficits, if unchecked, would eventually result in declining investment and capital stock and, inevitably, falling living standards; (8) over the long term, the "no action" scenario is unsustainable and timely policy action can avoid these economic consequences; (9) while a "no action" simulation is not a forecast of what will happen, it illustrates the nature of future fiscal challenges; (10) the alternative simulations illustrate the potential fiscal and economic benefits of achieving a sustainable budget policy; (11) a fiscal policy of balance through 2050 or extended periods of surplus, for example, could shrink the burden of federal interest costs considerably and also result in a larger economy over the long term; (12) all of these alternative policies would increase per capita GDP in 2050 by more than 35 percent over a "no action" policy, but they would require additional fiscal policy changes; (13) some changes would be difficult to achieve, but over the long term they would strengthen the nation's economy and overall living standards; (14) early action would permit changes in, for example, Social Security or health care benefits, time to adjust; (15) in considering what fiscal adjustments to make, policymakers need to be presented with more complete information on the costs of the government's existing long-term commitments; (16) the budget's current structure and reporting mechanisms have not focused attention on such commitment, nor has the budget process facilitated their explicit consideration; and (17) options to change budget reporting and process to improve recognition of these commitments and prompt early action warrant further exploration.