	The Nation’s Long- Term Fiscal Challenge

Long-term fiscal simulations by GAO, CBO, and others all show that  despite some modest improvement in near-term deficits, we face large and  growing structural deficits driven primarily by rising health care costs and  known demographic trends. In fact, the long-term fiscal challenge is  largely a health care challenge. Although Social Security is important  because of its size, the real driver is health care spending. It is both large  and projected to grow more rapidly in the future. GAO’s current long-term simulations show ever-larger deficits resulting in  a federal debt burden that ultimately spirals out of control. Although  the timing of deficits and the resulting debt build up varies depending on  the assumptions used, both simulations show that we are on an  unsustainable fiscal path. The bottom line is that the nation’s longer-term fiscal outlook is daunting  under any realistic policy scenario or assumptions. Continuing on this  unsustainable fiscal path will gradually erode, if not suddenly damage, our  economy, our standard of living, and ultimately our national security. Our  current path also increasingly will constrain our ability to address  emerging and unexpected budgetary needs and increase the burdens that  will be faced by future generations. As I noted earlier, despite some recent improvements in short-term  deficits, the long-term outlook is moving in the wrong direction. Rapidly rising health care costs are not simply a federal budget problem;  they are our nation’s number one fiscal challenge. The longer-term fiscal challenge we face is not solely a federal one—it is a  national one. Figure 5 shows both the federal fiscal path and the fiscal  path for the whole of government. Certainly controlling discretionary spending is important, but—as  everyone in this room knows even with the large costs associated with the  “Global War on Terrorism” and Iraq—discretionary spending is not the  part of the budget that drives the long-term fiscal imbalance. Taken together, it  is clear that Social Security, Medicare, and Medicaid represent an  unsustainable burden on the federal budget, our economy, and future  generations. This “good news,” however, did not signal any improvement  in the long-term outlook. The problem isn’t this year’s deficit—or even the  deficit in 2012. The problem is that we are on an imprudent and  unsustainable path. Then why should we  consider restoration of statutory PAYGO? Looking  ahead, the budget process will need to go beyond limiting expansions. Information over a longer time horizon: (1) The President’s  budget should include an estimate of the impact of any major  spending or tax proposals on these fiscal exposures and on the  long-term fiscal outlook; (2) The budget should provide year-by-year  data for 10 fiscal years rather than the current 5; and (3) The  President’s budget should include a statement of his budgetary  goals for the next decade. I have said that the  first thing to do is stop digging—and the restoration of credible  discretionary caps and PAYGO on both the spending and tax side of the  ledger can help with that. They need to be given the facts about the fiscal outlook: what it is, what  drives it, and what it will take to address it. We at GAO  stand ready to assist you in this important effort. Scope and Methodology

My remarks are based largely on previous reports and testimonies, such as  Long-Term Budget Outlook: Deficits Matter—Saving Our Future Requires  Tough Choices Today (GAO-07-389T) and Budget Process: Better  Transparency, Controls, Triggers, and Default Mechanisms Would Help to  Address Our Large and Growing Long-term Fiscal Challenge (GAO-06- 761T). We updated these testimonies with the results from our most recent  long-term simulations in The Nation’s Long-Term Fiscal Outlook: April  2007 Update (GAO-07-983R). Contact and Acknowledgments

Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this testimony.
Why GAO Did This Study

This testimony relates to the broader question: How should we deal with our nation's long-term fiscal challenge in order to help ensure that our future is better than our past? This testimony will start with our longer-term fiscal challenge. Then it will turn to the process question you present at this hearing: the reimposition of a statutory PAYGO rule(s) as a step toward dealing with this challenge. Finally it will talk about moving beyond caps and PAYGO to some ideas on how improved transparency and process changes can help in the effort to put us on a more prudent and sustainable long-term fiscal path. As widely reported earlier this month, the Administration now expects the deficit for fiscal year 2007 to be $205 billion, down from its February estimate of $244 billion and last year's deficit of $248 billion. However, because these numbers include the Social Security surpluses, they mask what GAO likes to call the "operating deficit" now estimated to be $385 billion for fiscal year 2007. Clearly lower short-term deficits are better than higher short-term deficits. However, our real challenge is not short-term deficits, rather it's the long-term structural deficits and related debt burdens that could swamp our ship of state if we do not get serious soon. Specifically, while our near-term fiscal picture is better, our long-term fiscal outlook is not. Health care costs are still growing faster than the economy and the population is still aging. Indeed, what we call the long-term fiscal challenge is not in the distant future. The first of the baby boomers become eligible for early retirement under Social Security on January 1, 2008--less than 1 year from now-- and for Medicare benefits in 2011--just 3 years later. The budget and economic implications of the baby boom generation's retirement have already become a factor in Congressional Budget Office's (CBO) 10-year baseline projections and will only intensify as the baby boomers age. Simply put, our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time. Herbert Stein once said that something that is not sustainable will stop. That, however, should not give us comfort. Clearly, it is more prudent to change the path than to wait until a crisis occurs. While restraint in the near term and efforts to balance the budget over the next 5 years can be positive, they are not enough. It is also important that we take steps to address our longer-term fiscal imbalance. The real problem is not the nearterm deficit--it is the long-term fiscal outlook. It is important to look beyond year 5 or even year 10. Both the budget and the budget process need more transparency over and focus on the long-term implications of current and proposed spending and tax policies. GAO will suggest a number of things that it believes will help in this area in this testimony. These remarks are based on our previous work on a variety of issues, including reports and testimonies on our nation's long-term fiscal challenges and budget process reform. These efforts were conducted in accordance with generally accepted government auditing standards.

What GAO Found

Long-term fiscal simulations by GAO, CBO, and others all show that despite some modest improvement in near-term deficits, we face large and growing structural deficits driven primarily by rising health care costs and known demographic trends. In fact, the long-term fiscal challenge is largely a health care challenge. Although Social Security is important because of its size, the real driver is health care spending. It is both large and projected to grow more rapidly in the future. GAO's current long-term simulations show ever-larger deficits resulting in a federal debt burden that ultimately spirals out of control. Although the timing of deficits and the resulting debt build up varies depending on the assumptions used, both simulations show that we are on an unsustainable fiscal path. The bottom line is that the nation's longer-term fiscal outlook is daunting under any realistic policy scenario or assumptions. Continuing on this unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Our current path also increasingly will constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations.