Since our 1992 report, the Congress and the President have taken action on the deficit. By drastically reducing national saving, rising deficits would shrink private investment and eventually result in a declining capital stock. Deficit Reduction Would Promote Economic Growth in the Long Term

The economic benefits of deficit reduction are illustrated by the three fiscal paths we simulate in our model. The deficit reduction necessary to achieve beneficial long-term economic outcomes and reduced interest costs would entail difficult budgetary reductions and require a greater share of national income to be devoted to saving, thus foregoing some consumption in the short term. A cut in this spending area reduces the proportion of the budget growing quickly, thereby reducing the total budget growth. Fiscal Pressures Will Continue

Even if a balanced budget is achieved early in the next century, deficits could reemerge as the coming demographic changes continue to exert fiscal pressures. Budget Policy: Long-Term Implications of the Deficit (GAO/T-OCG-93-6, Mar. Budget Policy: Prompt Action Necessary to Avert Long-Term Damage to the Economy (GAO/OCG-92-2, June 5, 1992).
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the long-term economic impacts of the budget deficit.

What GAO Found

GAO found that: (1) some progress has been made in reducing the deficit since 1992, but the long-term deficit outlook remains a national problem; (2) inaction in reducing the deficit would inevitably result in a declining economy; (3) although taking action to reduce the deficit would promote long-term economic growth and reduce interest costs, such action would require significant budget adjustments; (4) early reductions in fast growing areas, such as health programs, would contribute more to the elimination of long-term deficits than other types of spending reductions; (5) even after a balanced budget is achieved, deficits could continue to emerge as demographic changes exert fiscal pressures; and (6) Congress faces difficult tradeoffs between the short- and long-term economic benefits of deficit reduction.