	The Long-Term Budget Outlook

Three years ago when I appeared before this Committee, I spoke about a  large and growing long-term fiscal gap driven largely by known  demographic trends and rising health care costs. GAO’s long-term simulations illustrate the magnitude of the fiscal  challenges associated with an aging society and the significance of the  related challenges the government will be called upon to address. Although revenues will be part of the debate about our fiscal  future, making no changes to Social Security, Medicare, Medicaid, and  other drivers of the long-term fiscal gap would require at least a doubling of  taxes—and that seems implausible. In my view, elected  representatives should have more explicit information on the present value  dollar costs of major spending and tax bills—before they vote on them. By extending beyond  conventional accounting, the concept of fiscal exposure is meant to  provide a broad perspective on long-term costs and uncertainties. Several approaches that could be used, depending on the type of program  and information available, are  include fiscal exposures in the budget process, and  include fiscal exposures in budget data. These trends, along with GAO’s institutional knowledge and issued work,  helped us identify the major challenges and specific questions. For example, Social Security faces a large  and growing structural financing challenge. Would such a change help respond to challenges  posed by demographic, economic, and technological changes? We believe that we at GAO have an obligation to assist  and support the Congress in this effort. Given the size of the long-term fiscal imbalances, all major spending and  revenue programs in the budget should be subject to periodic reviews and  reexamination. While it is important to consider the role and size of  government, how we finance government, and the major programs driving  the long-term spending path—Medicare, Medicaid, and Social Security— our recent fiscal history suggests that exempting major areas from  reexamination and review can undermine the credibility and political  support for the entire process.
Why GAO Did This Study

This testimony discusses the nation's long-term fiscal outlook and the challenge it poses for the budget and oversight processes. First, GAO provides results of its most recent simulations of the long-term fiscal outlook, updating a model GAO initially developed in 1992. GAO also discusses some ideas for increasing transparency of the long-term costs of government commitments and the range of fiscal exposures. Finally, GAO discusses a forthcoming report that it believes will help the Congress in dealing with a range of performance and accountability issues. This report will provide policy makers with a comprehensive compendium of those areas throughout government that could be considered ripe for reexamination and review based on GAO's past work and institutional knowledge.

What GAO Found

The nation's fiscal policy is on an unsustainable course, and its long-term fiscal gap grew much larger in fiscal year 2004. Long-term budget simulations by GAO, the Congressional Budget Office, and others show that, over the long term the nation faces a large and growing structural deficit due primarily to known demographic trends and rising health care costs. Continuing on this unsustainable fiscal path will gradually erode, if not suddenly damage, the nation's economy, its standard of living, and ultimately its national security. The long-term outlook challenges the budget process to provide more transparency about the specific exposures that will encumber the nation's fiscal future. GAO feels that elected representatives should have more explicit information on the present value dollar costs of major spending and tax bills--before they vote on them. All simulations indicate that the problem is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. A fundamental reexamination of major spending and tax policies and priorities will be important to recapture fiscal flexibility and update the nation's programs and priorities to respond to emerging social, economic, and security changes.