	The Long-Term Fiscal Outlook Remains Unsustainable

The unified budget deficit declined between fiscal years 2003 and 2007, but  this did not change the long-term path: it remains unsustainable. Moreover, while the recent past shows some progress in the annual  unified deficit figures, any assessment of the federal government’s long- term fiscal outlook also needs to recognize the fact that the Social Security  cash surplus has been used to offset spending in the rest of government  for many years. Figure 1 shows GAO’s simulation of the deficit path based on recent trends  and policy preferences. Rapidly rising health care costs are not simply a federal budget problem;  they are a problem for other levels of government and other sectors. As  shown in figure 3, GAO’s fiscal model demonstrates that state and local  governments—absent policy changes—will also face large and growing  fiscal challenges beginning within the next few years. As is true for the  federal budget, growth in health-related spending—Medicaid and health  insurance for state and local employees and retirees—is the primary driver  of the long-term fiscal challenges facing the state and local governments. The Federal Government’s Long- Term Fiscal Outlook Is Driven Primarily by Health Care

The large fiscal gap is primarily the result of spending on Medicare and  Medicaid, which continue to consume ever-larger shares of both the  federal budget and the economy. While growth in public spending strains  government budgets, growth in private sector health care costs erodes  employers’ ability to provide coverage to their workers and undercuts  their ability to compete internationally. Systemwide Growth in Health Care Spending Is Driven by Certain Key Factors

Public and private health care spending continues to rise because of  several key factors, including the following:    Medical technology. However, without reliable comparative  information on medical outcomes, quality of care, and cost, consumers are  less able to determine the best value. Obesity, smoking, and other population risk factors  can lead to expensive chronic conditions, such as diabetes and heart  disease. The increased prevalence of such conditions drives spending as  the utilization of health care resources rises. Addressing these drivers will be a major societal challenge. The Window of Opportunity Is Narrowing

Here in the first half of 2008, the long-term fiscal challenge is not in the  distant future. The longer action on reforming heath care  and Social Security is delayed, the more painful and difficult the choices  will become. Simply put, the federal budget is on an unsustainable long- term fiscal path that is getting worse with the passage of time. Attention should be focused not only on the  spending side of the budget but also on the revenue side. Meeting the nation’s long-term fiscal challenge will require a multipronged  approach bringing people together to tackle health care, Social Security,  and the tax system as well as    strengthening oversight of programs and activities, including creating  approaches to better facilitate the discussion of integrated solutions to  cross-cutting issues; and  reengineering and reprioritizing the federal government’s existing  programs, policies, and activities to address 21st century challenges and  capitalize on related opportunities. Demographics are a  smaller component than rapid health care cost growth, but the two  interact, and aging is not a trivial contributor to the federal government’s  long-term fiscal condition.
Why GAO Did This Study

GAO was asked to provide its views on the long-term fiscal outlook. This statement addresses four key points: (1) the federal government's long-term fiscal outlook is a matter of utmost concern; (2) this challenge is driven primarily by health care cost growth; (3) reform of health care is essential but other areas also need attention which requires a multipronged solution; and (4) the federal government faces increasing pressures yet a shrinking window of opportunity for phasing in needed adjustments. GAO's simulations of the federal government's long-term fiscal outlook were updated with the Trustees 2008 intermediate projections and continue to indicate that the long-term outlook is unsustainable. This update combined with GAO's analysis of the fiscal outlook of state and local governments demonstrates that the fiscal challenges facing all levels of government are linked and should be considered in a strategic and integrated manner. Since 1992, GAO has published long-term fiscal simulations of what might happen to federal deficits and debt levels under varying policy assumptions. GAO developed its long-term model in response to a bipartisan request from Members of Congress who were concerned about the longterm effects of fiscal policy. Information about GAO's model and assumptions can be found at http://www.gao.gov/special.pubs/longterm/ .

What GAO Found

Long-term fiscal simulations by GAO, the Congressional Budget Office (CBO), and others all show that despite a decline in the federal government's unified budget deficit between fiscal years 2003 and 2007, it still faces large and growing structural deficits driven primarily by rising health care costs and known demographic trends. Simply put, the federal government is on an unsustainable long-term fiscal path. Although Social Security is important because of its size, over the long term health care spending is the principal driver--Medicare and Medicaid are both large and projected to continue growing rapidly in the future. Rapidly rising health care costs are not simply a federal budget problem. Growth in health-related spending is the primary driver of the fiscal challenges facing state and local governments as well. Unsustainable growth in health care spending also threatens to erode the ability of employers to provide coverage to their workers and undercuts their ability to compete in a global marketplace. Public and private health care spending continues to rise because of several key factors: (1) increased utilization of new and existing medical technology; (2) lack of reliable comparative information on medical outcomes, quality of care, and cost; and (3) increased prevalence of risk factors such as obesity that can lead to expensive chronic conditions. Addressing health care costs and demographics--and their interaction--will be a major societal challenge. The longer action on reforming heath care and Social Security is delayed, the more painful and difficult the choices will become. The federal government faces increasing pressures yet a shrinking window of opportunity for phasing in adjustments. In fact, the oldest members of the baby-boom generation are now eligible for Social Security retirement benefits and will be eligible for Medicare benefits in less than 3 years. Additionally, in addressing this fiscal challenge it will be important to review other programs and activities on both the spending and revenue sides of the budget.