Short-term accounting or budget measures, however, provide only a partial view of the costs of federal programs and policies, and they frequently offer a potentially misleading view of the federal government's ability to pay its bills in the long term. Short-term measures, such as annual budget estimates, or medium-term measures, such as the Congressional Budget Office (CBO) 10-year baseline estimates, do not reflect long-term fiscal imbalances, and in particular they do not reflect the large anticipated costs needed to finance the baby-boom generation's retirement. Therefore, if short- and medium-term measures are not used in conjunction with long-term fiscal measures, then long-term fiscal effects of current policy will be understated or hidden. Most independent analysts believe that changes will be enacted to limit revenues collected by the AMT to levels far below CBO baseline projections. This implies that political pressure to extend AMT fixes will be substantial. Those measures will then provide an overly optimistic picture of the long-term fiscal situation. Second, the structure of the economy changes over time in unpredictable ways. The determinants of economic growth are discussed below. Small differences in economic growth rates lead to large differences in the size of the economy in the long term, so assumptions that affect growth rates will have significant effects on long-term forecasts. Faster growth rates would lead to higher tax revenues, but would also increase spending for two reasons. Health Care Trends

Rising spending on federally-financed health care is the major cause for projected increases in government expenditures and accounts for the largest part of long-term fiscal imbalances. Graphical Presentations of Year-by-Year Projections

Perhaps the most direct method of showing the magnitude of future fiscal challenges is to present figures depicting the projected path of deficits or the divergence between federal spending and revenues. Future taxes and future benefits from government programs will be risky for various reasons. Fiscal gap is defined as the size of the immediate and permanent increase in tax revenues or decrease in non-interest expenditures needed to ensure that the public debt to GDP ratio at the end of the budget window is the same as the initial public debt to GDP ratio. However, short-term measures may provide a misleading impression of the government's fiscal condition because of the revenues and spending in the years beyond the budget window, which they do not measure. How Big Are Federal Fiscal Imbalances? Typically, these alternative projections assume that major tax cuts will not sunset in 2010, the number of filers subject to the AMT will be capped and that discretionary expenditures will increase at the same rate as the rest of the economy. The Long-Term Fiscal Situation

The federal government faces large fiscal imbalances.
Short-term budget estimates, while critical for program administration and congressional spending decisions, provide a partial and potentially misleading impression of the federal government's fiscal situation. On the other hand, long-term measures have their own limitations. On the positive side, they indicate the magnitude of long-term budget imbalances resulting from the gap between future federal tax revenues and the costs of providing retirement and health care for the baby-boom generation. However, long-term projections are subject to substantial uncertainties for two reasons. First, statistical theory implies that expected forecasting error is larger for more-distant events because errors accumulate over each period into the future. Second, the structure of the economy changes over time, so that assumptions based on the past behavior of the economy may not hold in the future. Thus short-term measures, which are relatively certain but which ignore future imbalances, must be used in conjunction with long-term measures, which indicate the size of future imbalances, but with more variability, in order to gain an accurate picture of the fiscal challenges facing the federal government. Long-run fiscal projections depend on determinants of economic growth—such as productivity, and increases in capital stock and labor force—and the growth of health care costs.
This report describes and analyzes several measures of the long-term fiscal condition of the federal government. The strengths and limitations of long-term, short-term, and medium-term fiscal measures are discussed. The report then provides an overview of the federal government's long-term fiscal situation.
Most independent analysts believe the federal government's fiscal position is more accurately summarized by projections that modify the Congressional Budget Office baseline by assuming the reach of the alternative minimum tax (AMT) will be capped at present levels, that tax cuts slated to expire in 2010 will in fact be extended, and that discretionary spending will keep pace with overall economic growth. Seventy-five-year projections employing these alternative assumptions put the long-term fiscal gap between revenues and spending at 7%-8% of gross domestic product (GDP). Fiscal gap is defined as the size of the immediate and permanent increase in tax revenues or decrease in non-interest expenditures needed to ensure that the public debt to GDP ratio at the end of the budget window is the same as the initial public debt to GDP ratio. These modified-baseline projections indicate that putting federal fiscal policy on a sustainable path for the next 75 years requires substantial increases in taxes, decreases in spending, or both. Changes needed to maintain a permanently sustainable fiscal stance would be even greater.
This report will be updated as events warrant.