Long-Term Fiscal Issues: Increasing Transparency and Reexamining 
the Base of the Federal Budget (08-FEB-05, GAO-05-317T).	 
                                                                 
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.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-317T					        
    ACCNO:   A17077						        
  TITLE:     Long-Term Fiscal Issues: Increasing Transparency and     
Reexamining the Base of the Federal Budget			 
     DATE:   02/08/2005 
  SUBJECT:   Budget deficit					 
	     Data collection					 
	     Economic analysis					 
	     Economic policies					 
	     Financial analysis 				 
	     Financial management				 
	     Fiscal policies					 
	     Future budget projections				 
	     Strategic planning 				 
	     Medicaid Program					 
	     Medicare Program					 
	     Social Security Program				 
	     Social Security Trust Fund 			 

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GAO-05-317T

                 United States Government Accountability Office

                                 GAO Testimony

Before the Senate Budget Committee

For Release on Delivery Expected at 10 a.m. EST Tuesday, February 8, 2005

LONG-TERM FISCAL ISSUES

     Increasing Transparency and Reexamining the Base of the Federal Budget

Statement of David M. Walker Comptroller General of the United States

                                       a

GAO-05-317T

Mr. Chairman, Senator Conrad, Members of the Committee:

I appreciate this opportunity to talk with you about our nation's
long-term fiscal outlook and the challenge it poses for the budget and
oversight processes. Today, I will first provide the committee with the
results of our most recent simulations of the long term fiscal outlook,
updating a model we initially developed for members of this Committee in
1992. I will also discuss some ideas for increasing transparency of the
long-term costs of government commitments and the range of fiscal
exposures-work we first did at the request of your counterparts in the
House.1 Finally, I will talk about a forthcoming report that we believe
will help the Congress in dealing with a range of performance and
accountability issues. As this Committee knows, we periodically pull
together our work for the Congress in ways we hope will help in its budget
and programmatic deliberations and oversight activities.2 Our recently
issued High-Risk update is the most recent example.3 All of these are part
of our periodic efforts to provide our professional insights about
programs or operations needing oversight and review through such series as
high risk and budget options reports.4

Next week we will issue another report that builds on our past and pending
work-90 percent of which is requested by the Congress or required by
law-to provide policy makers with a comprehensive compendium of those
areas throughout government that could be considered ripe for
reexamination and review based on our past work and institutional
knowledge. This report is entitled 21st Century Challenges: Reexamining
the Base of Government. In this report we will present illustrative
questions for policy makers to consider as they carry out their
responsibilities. These questions look across major areas of the budget
and federal operations including discretionary and mandatory spending, and
tax policies and programs. These questions are intended as one input among
many that Congress will receive as it decides what its agenda will be for
oversight and program review through its various committees. Others

1GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs
and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

2 See, for example, GAO, Opportunities for Congressional Oversight and
Improved Use of Taxpayer Funds: Budgetary Implications of Selected GAO
Work, GAO-04-649 (Washington, D.C.: May 7, 2004).

3GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: Jan.
2005).

4Legislative Reorganization Act of 1970, 31 U.S.C. Section 717(b).

have formulated very detailed comprehensive agendas with specific policy
proposals-the President's budget released yesterday is one very prominent
example. We hope that this new report will be used by various
congressional committees as they consider which areas of government need
particular attention and reconsideration, recognizing that while answers
to these questions may draw on the work of GAO and others, only elected
officials can and should decide whether, how, and when to move forward.

The overall picture on the long term fiscal outlook is not news to this
Committee. Simply put, our nation's fiscal policy is on an unsustainable
course and our long-term fiscal gap grew much larger in fiscal year 2004.
Long-term budget simulations by GAO, the Congressional Budget Office
(CBO), and others show that, over the long term we face 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, our economy, our standard of
living, and ultimately our national security. Our current path also will
increasingly constrain our ability to address emerging and unexpected
budgetary needs and increase the burdens that will be faced by future
generations.

As this Committee knows, the long-term outlook challenges the budget
process to provide more transparency about the specific exposures that
will encumber our fiscal future. While the 10-year outlook is important,
Congress may wish to think more about what metrics and measures need to be
added to more clearly identify the long-term consequences of current
proposals before legislative action is taken. 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. In
my testimony, I will discuss changes in the information provided and
budgetary incentives that could improve transparency, prompting more
deliberation about and improving budgetary incentives to address such
bills.

Regardless of the assumptions used, 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. Rather, a
fundamental reexamination of major spending and tax policies and
priorities will be important to recapture our fiscal flexibility and
update our programs and priorities to respond to emerging social,
economic, and security changes. Ultimately, this reexamination will entail
a national

discussion about what Americans want from their government and how much
they are willing to pay for those things. Many, if not most, current
federal programs and policies, in fact, were designed decades ago to
respond to trends and challenges that existed at the time of their
creation. Our recent entry into a new century has helped to remind us of
how much has changed in the past several decades-whether it be rapid
shifts in the security threats facing the nation, the aging of our
population, the globalization of economic transactions, the escalation of
health care costs, increased environmental concerns, or the significant
advances in technologies and transportation systems. This discussion will
not be easy since there is no "low hanging fruit" in the budget, but
acting sooner will enable us to avoid precipitous changes while providing
more transition time.

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.5 Unfortunately, despite a brief
period with budget surpluses, that gap has grown much wider. Last year's
Medicare prescription drug bill was a major factor, adding $8.1 trillion
to the outstanding commitments and obligations of the U.S. government in
long-term present value terms. The near-term deficits also
reflected-higher Defense, homeland security, and overall discretionary
spending which exceeded growth in the economy, as well as revenues which
have fallen below historical averages due to policy decisions and other
economic and technical factors. While the size of the nation's longterm
fiscal imbalance has grown significantly, the retirement of the "baby
boom" generation has come closer to becoming a reality. Given these and
other factors, it is clear that the nation's current fiscal path is
unsustainable and that tough choices will be necessary in order to address
the growing imbalance.

The cost implications of the baby boom generation's retirement have
already become a factor in CBO's baseline projections and will only
intensify as the baby boomers age. According to CBO, total federal
spending for Social Security, Medicare, and Medicaid is projected to grow
by about 25 percent over the next 10 years-from 8.4 percent of GDP in 2004
to 10.4 percent in 2015. Although the Trustees' 2004 intermediate

5GAO, Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T (Washington,
D.C.: Feb. 27, 2002).

estimates project that the combined Social Security Trust Funds will be
solvent until 2042,6 program spending will constitute a rapidly growing
share of the budget and the economy well before that date. Under the
Trustees' 2004 intermediate estimates, Social Security's cash surplus-the
difference between program tax income and the costs of paying scheduled
benefits-will begin a permanent decline beginning in 2008. To finance the
same level of overall federal spending as in the previous year, additional
revenues and/or increased borrowing will be needed in every subsequent
year. (See fig. 1.)

Figure 1: Social Security and Medicare's Hospital Insurance Trust Funds
Face Cash Deficits Billions of 2004 dollars

250

0

-250

-500

-750 2000 2005 2010 2015 2020 2025 2030 2035 2040

Social Security cash flow

Medicare HI cash flow

Source: GAO analysis based on data from the Office of the Chief Actuary,
Social Security Administration and Office of the Actuary, Centers for
Medicare and Medicaid Services.

Note: Projections based on the intermediate assumptions of the 2004
Trustees' reports.

By 2018, Social Security's cash income (tax revenue) is projected to fall
below benefit payments. At that time, Social Security will join Medicare's
Hospital Insurance Trust Fund, whose outlays exceeded cash income in

6Separately, the Disability Insurance (DI) fund is projected to be
exhausted in 2029 and the Old-Age and Survivors' Insurance (OASI) fund in
2044. Using slightly different economic assumptions and model
specifications, CBO estimated the combined Social Security trust fund will
be solvent until 2052. CBO, The Outlook for Social Security (Washington,
D.C.: June 2004).

2004, as a net claimant on the rest of the federal budget. The combined
OASDI Trust Funds will begin drawing on the Treasury to cover the cash
shortfall, first relying on interest income and eventually drawing down
accumulated trust fund assets. At this point, Treasury will need to obtain
cash for those redeemed securities either through increased taxes,
spending cuts, and/or more borrowing from the public than would have been
the case had Social Security's cash flow remained positive.

Ultimately, the critical question is not how much a misleadingly labeled
"trust fund" has in assets, but whether the government as a whole can
afford the benefits in the future and at what cost to other claims on
scarce resources. As I have said before, the future sustainability of
programs is the key issue policy makers should address-that is, the
capacity of the economy and budget to afford the commitment in light of
overall current and projected fiscal conditions.

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. Figures
2 and 3 present these simulations under two different sets of assumptions.
In the first, we begin with CBO's January baseline-constructed according
to the statutory requirements for that baseline.7 Consistent with these
requirements, discretionary spending is assumed to grow with inflation for
the first 10 years and tax cuts scheduled to expire are assumed to expire.
After 2015, discretionary spending is assumed to grow with the economy,
and revenue is held constant as a share of GDP at the 2015 level. In the
second figure, two assumptions are changed: (1) discretionary spending is
assumed to grow with the economy after 2005 rather than merely with
inflation, and (2) the tax cuts are extended. For both simulations, Social
Security and Medicare spending is based on the 2004 Trustees' intermediate
projections, and we assume that benefits continue to be paid in full after
the trust funds are exhausted. Medicaid spending is based on CBO's
December 2003 long-term projections under mid-range assumptions.

7The Congressional Budget Office, The Budget and Economic Outlook: Fiscal
Years 2006 to 2015, (Washington, D.C.: Jan. 2005).

Figure 2: Composition of Spending as a Share of Gross Domestic Product
(GDP) Under Baseline Extended

Percent of GDP 50 40 30 20 10 0

Revenue

2004 2015 2030 2040 Fiscal year

All other spending Medicare & Medicaid Social Security Net interest

Source: GAO's January 2005 analysis.

Note: In addition to the expiration of tax cuts, revenue as a share of GDP
increases through 2015 due to (1) real bracket creep, (2) more taxpayers
becoming subject to the Alternative Minimum Tax (AMT), and (3) increased
revenue from tax-deferred retirement accounts. After 2015, revenue as a
share of GDP is held constant.

Figure 3: Composition of Spending as a Share of Gross Domestic Product
Assuming Discretionary Spending Grows with GDP after 2005 and All Expiring
Tax Provisions Are Extended

Percent of GDP

50

40

30

20

10

0

                              2004 2015 2030 2040

Fiscal year

All other spending

Medicare & Medicaid

Social Security

Net interest

Source: GAO's January 2005 analysis

Note: Although expiring tax provisions are extended, revenue as a share of
GDP increases through 2015 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the AMT, and (3) increased revenue from
tax-deferred retirement accounts. After 2015, revenue as a share of GDP is
held constant.

As both these simulations illustrate, absent policy changes on the
spending or revenue side of the budget, the growth in spending on federal
retirement and health entitlements will encumber an escalating share of
the government's resources. Indeed, when we assume that recent tax
reductions are made permanent and discretionary spending keeps pace with
the economy, our long-term simulations suggest that by 2040 federal
revenues may be adequate to pay little more than interest on the federal
debt. Neither slowing the growth in discretionary spending nor allowing
the tax provisions to expire-nor both together-would eliminate the
imbalance. 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. Accordingly, substantive
reform of Social Security and our major health programs remains critical
to recapturing our future fiscal flexibility.

Although considerable uncertainty surrounds long-term budget projections,
we know two things for certain: the population is aging and the baby boom
generation is approaching retirement age. The aging population and rising
health care spending will have significant implications not only for the
budget, but also the economy as a whole. Figure 4 shows the total future
draw on the economy represented by Social Security, Medicare, and
Medicaid. Under the 2004 Trustees' intermediate estimates and CBO's
longterm Medicaid estimates, spending for these entitlement programs
combined will grow to 15.6 percent of GDP in 2030 from today's 8.5
percent. It is clear that, taken together, Social Security, Medicare, and
Medicaid represent an unsustainable burden on future generations.

Figure 4: Social Security, Medicare, and Medicaid Spending as a Percent of
GDP

Percent of GDP

30

25

20

15

10

5

0 2000 2010 2020 2030 2040 2050 2060 2070 2080

Source: GAO analysis based on data from the Office of the Chief Actuary,
Social Security Administration, Office of the Actuary, Centers for
Medicare and Medicaid Services, and the Congressional Budget Office.

Note: Social Security and Medicare projections based on the intermediate
assumptions of the 2004 Trustees' Reports. Medicaid projections based on
CBO's January 2005 short-term Medicaid estimates and CBO's December 2003
long-term Medicaid projections under mid-range assumptions.

The government can help ease future fiscal burdens through spending
reductions or revenue actions that reduce debt held by the public, saving
for the future, and enhancing the pool of economic resources available for
private investment and long-term growth. Economic growth is essential, but
we will not be able to simply grow our way out of the problem. The numbers
speak loudly: Our projected fiscal gap is simply too great. Closing

the current long-term fiscal gap would require sustained economic growth
far beyond that experienced in U.S. economic history since World War II.
Tough choices are inevitable, and the sooner we act the better.

The retirement of the baby boom generation is not the only demographic
challenge facing our nation. People are living longer and spending more
time in retirement. As shown in figure 5, the U.S. elderly dependency
ratio is expected to continue to increase.8 The proportion of the elderly
population relative to the working-age population in the U.S. rose from 13
percent in 1950 to 19 percent in 2000. By 2050, there is projected to be
almost 1 elderly dependent for every 3 people of working age-a ratio of 32
percent. Additionally, the average life expectancy of males at birth has
increased from 66.6 in 1960 to 74.3 in 2000, with females at birth
experiencing a rise from 73.1 to 79.7 over the same period. As general
life expectancy has increased in the United States, there has also been an
increase in the number of years spent in retirement.

Figure 5: U.S. Elderly Dependency Ratio Expected to Continue to Increase

Elderly dependency ratio (in percent)

35

30

25

20

15

10

5

0 1950 1980 2000 2030 2050

Source: Population division of the Department of Economic and Social
Affairs of the United Nations Secretariat, World Population Prospects:
2002 Revision and World Urbanization Prospects: 2001 Revision. Data for
2030 - 2050 are projected.

8The elderly dependency ratio is the ratio of the population aged 65 years
or over to the population aged 15 to 64.

A falling fertility rate is the other principal factor underlying the
growth in the elderly's share of the population. In the 1960s, the
fertility rate was an average of 3 children per woman. Today it is a
little over 2, and by 2030 it is expected to fall to 1.95. The combination
of these factors means that annual labor force growth will begin to slow
after 2010 and by 2025 is expected to be less than a fifth of what it is
today. (See fig. 6.) Thus, relatively fewer workers will be available to
produce the goods and services that all will consume. Lower labor force
growth will lead to slower growth in the economy and to slower growth of
federal revenues. This in turn will only accentuate the overall pressure
on the federal budget.

Figure 6: Labor Force Growth Is Expected to Slow Significantly

Percentage change (5-yr moving average)

3

2

1

0

          1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Source: GAO analysis of data from the Office of the Chief Actuary, Social
Security Administration.

Note: Percentage change is calculated as a centered 5-year moving average
of projections based on the intermediate assumptions of the 2004 Trustees'
Reports.

Increased investment could increase the productivity of workers and spur
economic growth. However, increasing investment depends on national
saving, which remains at historically low levels. Historically, the most
direct way for the federal government to increase saving has been to
reduce the deficit (or run a surplus). Although the government may try to
increase personal saving, results of these efforts have been mixed. For
example, even with the preferential tax treatment granted since the 1970s
to encourage retirement saving, the personal saving rate has steadily
declined. (See fig. 7.) Even if the economic growth increases, the
structure of retirement programs and historical experience in health care
cost

growth suggest that higher economic growth results in a generally
commensurate growth in spending for these programs over the long run.9

Figure 7: Personal Saving Rate Has Steadily Declined

Percentage of disposable personal income

12

10

8

6

4

2

0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Source: Bureau of Economic Analysis.

In recent years, personal saving by households has reached record lows,
while at the same time the federal budget deficit has climbed.
Accordingly, national saving has diminished, but the economy has continued
to grow, in part because more and better investments were made. That is,
each dollar saved bought more investment goods, and a greater share of
saving was invested in highly productive information technology. The
economy has also continued to grow because the United States was able to
invest more than it saved by borrowing abroad, that is, by running a
current account deficit. However, a portion of the income generated by
foreign-owned assets in the United States must be paid to foreign lenders.
National saving is the only way a country can have its capital and own it
too.

The persistent U.S. current account deficits of recent years have
translated into a rising level of indebtedness to other countries.
However, many other nations currently financing investment in the United
States also will face

9Initial Social Security benefits are indexed to nominal wage growth,
resulting in higher benefits over time.

aging populations and declining national saving, so relying on foreign
savings to finance a large share of U.S. domestic investment or federal
borrowing is not a viable strategy for the long run.

In general, saving involves trading off consumption today for greater
consumption tomorrow. Our budget decisions today will have important
consequences for the living standards of future generations. The financial
burdens facing the smaller cohort of future workers in an aging society
would most certainly be lessened if the economic pie were enlarged. This
is no easy challenge, but in a very real sense, our fiscal decisions
affect the longer-term economy through their effects on national saving.

Early action to change these programs would yield the highest fiscal
dividends for the federal budget and would provide a longer period for
prospective beneficiaries to make adjustments in their own planning.
Waiting to build economic resources and reform future claims entails
risks. First, we lose an important window during which today's relatively
large workforce can increase saving and enhance productivity, two elements
critical to growing the future economy. We also lose the opportunity to
reduce the burden of interest in the federal budget, thereby creating a
legacy of higher debt as well as elderly entitlement spending for the
relatively smaller workforce of the future. Most critically, we risk
losing the opportunity to phase in changes gradually so that all can make
the adjustments needed in private and public plans to accommodate this
historic shift. Unfortunately, the long-range challenge has become more
difficult, and the window of opportunity to address the entitlement
challenge is narrowing.

Fiscal Exposures	Although Social Security, Medicare, and Medicaid drive
the long-term outlook, they are not the only federal programs or
activities in which the federal government has made long-term commitments.
At GAO, we are in the truth, transparency, and accountability business. A
crucial first step is to insist on truth and transparency in government
operations, including federal financial reporting, budgeting, and
legislative deliberations. The federal government must provide a fuller
and fairer picture of existing budget deficits, the misnamed "trust
funds," and the growing financial burdens facing every American,
especially younger Americans.

On the budget side, the current 10-year cash-flow projections are an
improvement over past practices. But given known demographic trends, even
these projections fail to capture the long-term consequences of

today's spending and tax policy choices. 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. We
believe that members of Congress, the President, and the public should
have information about any long-term commitments embodied in a current
policy decision. Some years ago, we developed the term "fiscal exposures"
to provide a conceptual framework for considering the wide range of
responsibilities, programs, and activities that may explicitly or
implicitly expose the federal government to future spending.10

Fiscal exposures vary widely as to source, extent of the government's
legal obligation, likelihood of occurrence, and magnitude. They include
not only liabilities, contingencies, and financial commitments that are
identified on the balance sheet or accompanying notes, but also
responsibilities and expectations for government spending that do not meet
the recognition or disclosure requirements for that statement. By
extending beyond conventional accounting, the concept of fiscal exposure
is meant to provide a broad perspective on long-term costs and
uncertainties. Fiscal exposures include items such as retirement benefits,
environmental cleanup costs, the funding gap in Social Security and
Medicare, and the life cycle cost for fixed assets. Given this variety, it
is useful to think of fiscal exposures as lying on a spectrum extending
from explicit liabilities to the implicit promises embedded in current
policy or public expectations. Table 1 shows some selected fiscal
exposures.11

10GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs
and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

11While this list provides some perspective on the range and magnitude of
exposures facing the federal government, it is neither meant to be
comprehensive nor to represent a universally agree-upon list.

Table 1: Selected Fiscal Exposures: Sources and Examples 2004a

Source: GAO analysis of data from the Department of the Treasury, the
Office of the Chief Actuary, Social Security Administration, and the
Office of the Actuary, Centers for Medicare and Medicaid Services.

aAll figures are as of the end of fiscal year 2004, except Social Security
and Medicare estimates, which are as of January 1, 2004.

bThis amount includes $845 billion held by military and civiian pension
and post-retirement health funds that would offset the explicit
liabilities reported by those funds.

cFigures for Social Security and Medicare are net of debt held by the
trust funds ($1,531 billion for Social Security, $256 billion for Medicare
Part A, and $24 billion for Medicare Part B) and represent net present
value estimates over a 75-year period. Over an infinite horizon, the
estimate for Social Security would be $10.4 trillion, $21.8 trillion for
Medicare Part A, $23.2 trillion for Medicare Part B, and $16.5 trillion
for Medicare Part D.

As currently structured, these fiscal exposures constitute significant and
in many cases growing encumbrances on the budgetary resources of the
future. The current budget projections primarily focus attention on the
5to10-year budget window. While this is an important and appropriate frame
for assessing the impacts of federal fiscal policy on the economy,
longerterm estimates and projections can also help provide important
perspective. At the macro level, the long-term fiscal models we and CBO
have developed should help frame the near-term choices we face by bringing
in information on their long-term impact. At the micro level, better
information on the longer-term costs of selected exposures-particularly
those scheduled to grow rapidly-can help focus attention on those

program commitments presenting significant fiscal burdens over the longer
term.

For example, in considering the prescription drug legislation, much
controversy was focused on the specific 10-year cost estimate that should
be used in the congressional consideration of this new entitlement.
However, comparatively little attention was paid to the long-term costs
that this new commitment would pose for future generations over a 75-year
period-$8.1 trillion in present value terms, net of premiums. Since the
full costs of this new entitlement increase significantly over the longer
term, decision makers need to be better informed about the growth path and
the impact on the nation's finances beyond the 10-year window.

The President and the Congress face the challenge of sorting out the many
claims on the federal budget without the budget enforcement
mechanisms-discretionary spending caps and pay-as-you-go (PAYGO)
discipline-or fiscal benchmarks that guided the federal government through
the years of deficit reduction into a brief period of federal surpluses.
While a number of steps will be necessary to address this challenge, truth
and transparency in financial reporting and budgeting are essential
elements of any attempt to address the nation's long-term fiscal
challenges. The fiscal risks can be managed only if they are properly
accounted for and publicly disclosed, including the many existing
commitments facing the government. In addition, new budget control
mechanisms will be required.

So what can we do to frame information and decisions so that decision
makers can appropriately focus on fiscal exposures? The variety of
certainties-and uncertainties-associated with fiscal exposures means that
no single approach to increasing attention to them will work in all cases.
Instead, targeted approaches for different types of fiscal exposures
would, I think, be most useful for incorporating a longer-term perspective
into the budget. Changes in the information provided, the budget process,
or budgetary incentives could be tailored selectively for different
categories of fiscal exposures to improve transparency, prompt more
deliberation about them, or improve budgetary incentives to address them.

Several approaches that could be used, depending on the type of program
and information available, are

o  improve supplemental reporting,

o  include fiscal exposures in the budget process, and

o  include fiscal exposures in budget data.

Figure 8 shows these alternative approaches and relates them to the
primary objective that each could help achieve. For example, approach III,
in which fiscal exposure cost estimates are incorporated directly into
budget data, would help achieve the objective of improving budgetary
incentives to address the fiscal exposures. Each approach could be
implemented in a number of ways, which I will briefly discuss.

Figure 8: Alternative Approaches to Using Fiscal Exposure Estimates in
Budget Decisions

                             Source: GAO analysis.

Approach I : Improve Improved supplemental reporting on fiscal exposures
would make

Supplemental Reporting	information more accessible to decision makers
without introducing additional uncertainty and complexity directly into
the budget. Estimates of the government's exposures would be reported in
various budget documents, but the current basis of reporting primary
budget data-budget

authority, obligations, outlays, and deficit/surplus-would not be changed.
In some cases, improving supplemental reporting may simply be a matter of
highlighting or expanding existing analytical work, such as continuing and
improving long-range projections and simulations of the budget as a whole.
Other ways of providing additional supplemental information could be
special analyses for certain significant fiscal exposures in the
Analytical Perspectives of the budget or an annual report on fiscal
exposures prepared by OMB. In the congressional budget process, greater
focus could center on the long-term net present value of proposed new
commitments for items where the 10-year estimate does not fully capture
the dimensions of cost growth expected, similar to the Medicare
prescription drug bill I mentioned earlier.

But another idea that we have discussed in the past12 is to routinely
report the future estimated costs of certain exposures as a separate
notational line in the budgetary schedules in the President's budget. For
example, an estimate of the future operating and maintenance costs
associated with capital acquisitions could be reported as the "exposure
level" for capital accounts that include the initial capital acquisition
costs. Similarly, the future funding needs associated with incrementally
funded projects could be included with the budget account that includes
the capital acquisition. And future environmental cleanup costs associated
with an asset acquisition could be handled the same way. The exposure
levels might be reported in present value terms. Including them as part of
the budget presentations at the account level would make such information
available along with the initial costs rather than in an additional
document and would clearly show the potential future costs associated with
current decisions.

Approach II: Include Fiscal Exposures in Budget Process

Budget process changes would go beyond simply providing more information
on fiscal exposures to establishing opportunities for explicit
consideration of these exposures. The Congress could modify budget rules
to provide for a point of order against any proposed legislation that
creates new exposures or increases the estimated costs of existing
exposures over some specified level. Or, revised rules could provide for a
point of order against any proposed legislation that does not include
estimates of the potential costs of fiscal exposures created by the
legislation.

12GAO-03-213.

A different budget process approach would be to establish triggers that
address the growth in existing exposures. In that case, triggers would be
established to signal when future costs of exposures rise above a certain
level. Reaching the trigger would require some action. For example, the
Medicare drug law enacted in December 2003 requires the Medicare trustees
to estimate the point at which general revenues will finance at least 45
percent of Medicare costs. If two consecutive trustee reports estimate
that this level will be reached within the next 6 years, the President is
required to include a proposal in his next budget and submit legislation
to change Medicare so that the 45 percent threshold will not be exceeded.
Congressional committees must then report Medicare legislation by June 30.
Like points of order, a trigger would require explicit consideration of
exposures facing the government without adding uncertainty to primary
budget data.

Approach III: Include Fiscal Exposures in Budget Data

Incorporating estimated future costs of fiscal exposures directly into
budget data by using accrual-based costs would represent the greatest
change of the three approaches I have outlined today. Accrual-based costs
could be used to measure budget authority and outlays for select programs
when doing so would enhance obligation-based control. This approach is
most suitable for explicit exposures for which reasonable cost estimates
are available.

For some time we have advocated the selective use of accrual measures in
the budget to better reflect costs at the time decisions are made.13 For
some major exposures, such as employee retirement benefits, insurance, and
environmental clean-up costs, the use of accrual-based measurement would
result in earlier cost recognition. This earlier recognition of costs
improves information available to decision makers about the costs
associated with current decisions and may improve the incentives to manage
these costs. Because the future costs of some exposures are dependent upon
many economic and technical variables that cannot be known in advance,
there will always be uncertainty in cost estimates. Such uncertainty makes
using accrual-based measurement directly in the budget

13GAO, Budget Issues: Budgeting for Federal Insurance Programs,
GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997); Accrual Budgeting:
Experiences of Other Nations and Implications for the United States,
GAO/AIMD-00-57 (Washington, D.C.: Feb. 18, 2000); Long-Term Commitments:
Improving the Budgetary Focus on Environmental Liabilities, GAO-03-219
(Washington, D.C.: Jan. 24, 2003).

more difficult. It may make sense for some exposures but not for others,
because the certainty of the government's commitment and the availability
of reasonable, unbiased estimates vary across the different fiscal
exposures.

21st Century Challenges: Reexamining the Base of the Federal Government

As I noted earlier, nothing less than a fundamental review, reexamination,
and reprioritization of all major spending and tax policies and programs
is needed. We at GAO believe we have an obligation to assist and support
you in this endeavor. So I would like to take some time this morning to
tell you more about the report we will soon be issuing on reexamining the
base of government-both to tell you why we are issuing this report and to
illustrate some of the specific questions we plan to raise. Having
identified the large and growing fiscal challenges facing the nation and
the other major trends and challenges facing the United States as outlined
in our strategic plan for serving the Congress, we thought we should look
to our work and provide examples of the kinds of hard choices stemming
from those challenges-in the form of questions for policy makers to
consider. These 21st century questions will cover discretionary spending;
mandatory spending, including entitlements; as well as tax policies and
programs-all in one accessible volume.

Mr. Chairman, we are talking about a major transformational challenge that
may take a generation to resolve. Traditional incremental approaches to
budgeting will need to give way to more fundamental and periodic
reexaminations of the base of government. Many, if not most current
federal programs and policies were designed decades ago to respond to
trends and challenges that existed at the time of their creation. If
government is to respond effectively to 21st century trends, it cannot
accept what it does, how it does it, who does it, and how it gets financed
as "given." Not only do outmoded commitments, operations, choices of
tools, management structures, and tax programs and policies constitute a
burden on future generations, but they also erode the government's
capacity to align itself with the needs and demands of the 21st century.

Confronting the fiscal imbalance would be difficult enough if all we had
to do is fund existing commitments. But a wide range of emerging needs and
demands can be expected to compete for a share of the budget pie. Whether
it be national or homeland security, transportation or education,
environmental cleanup or public health, a society with a growing
population-and ours is projected to grow by about 50 percent by the middle
of the 21st century-will generate new demand for federal action on

both the spending and tax sides of the budget. Reexamining older programs
and operations may enable us to free up resources to address some of these
emerging needs.

The specific 21st century questions were developed based on GAO's
strategic plan, which identified major trends that will shape the federal
role in the economy and our society going forward. (See table 2.)

                         Table 2: Strategic Plan Themes

o  Long-Range Fiscal Challenges  o  Demographic Shifts

o  Changing Security Threats  o  Science and Technology Advances

o  Increasing Global Interdependence  o  Quality of Life Trends

o  The Changing Economy  o  Changing Governance Structures

Source: GAO.

These trends, along with GAO's institutional knowledge and issued work,
helped us identify the major challenges and specific questions. The
specific questions were informed by a set of generic evaluation criteria
useful for reviewing any government program or activity, which are
displayed in table

3.

Table 3: Illustrative Generic Reexamination Criteria

Relevance of purpose Does it relate to an issue of nationwide interest? If
so, is a federal role warranted based on the likely failure of

and the federal role private markets or state and local governments to
address the underlying problem or concern? Does it encourage or discourage
these other sectors from investing their own resources to address the
problem?

Have there been significant changes in the country or the world that
relate to the reason for initiating it?

If the answer to the last question is "yes," should the activity be
changed or terminated, and if so, how? If the answer is unclear as to
whether changes make it no longer necessary, then ask, when, if ever, will
there no longer be a need for a federal role? In addition, ask, would we
enact it the same way if we were starting over today? Has it been subject
to comprehensive review, reassessment, and reprioritization by a qualified
and independent entity? If so, when? Have there been significant changes
since then? If so, is another review called for?

Is the current mission fully consistent with the initial or updated
statutory mission (e.g., no significant mission creep or morphing)? Is the
program, policy, function, or activity a direct result of specific
legislation?

Measuring success	How does it measure success? Are the measures reasonable
and consistent with the applicable statutory purpose? Are the measures
outcome-based, and are all applicable costs and benefits being considered?
If not, what is being done to do so?

    If there are outcome-based measures, how successful is it based on these
                                   measures?

Targeting benefits Is it well targeted to those with the greatest needs
and the least capacity to meet those needs?

Affordability and cost Is it affordable and financially sustainable over
the longer term, given known cost trends, risks, and future fiscal
effectiveness imbalances?

Is it using the most cost-effective or net beneficial approaches when
compared to other tools and program designs?

What would be the likely consequences of eliminating the program, policy,
function, or activity? What would be the likely implications if its total
funding was cut by 25 percent?

Best practices	If it fares well after considering all of these questions,
is the responsible entity employing prevailing best practices to discharge
its responsibilities and achieve its mission (e.g., strategic planning,
organizational alignment, human capital strategy, financial management,
technology management, acquisitions/sourcing strategy, change management,
knowledge management, client/customer service, risk management)?

Source: GAO.

In the report, we will describe the forces at work, the challenges they
present, and the 21st century questions they prompt, in each of 12 broad
areas based in large measure on functional areas in the federal budget,
but also including governmentwide issues and the revenue side of the
budget. Table 4 lists those 12 areas, which involve discretionary
spending; mandatory spending, including entitlements; and tax policies and
programs-all of them are a part of the base.

                      Table 4: Twelve Reexamination Areas

o  Defense  o  Natural Resources, Energy & Environment

o  Education & Employment  o  Retirement & Disability

o  Financial Regulation & Housing  o  Science & Technology  o Health Care 
o  Transportation

o  Homeland Security  o  Improving Governance

o  International Affairs  o  Reviewing the Tax System

Source: GAO.

Our forthcoming report contains over 200 individual illustrative questions
in these 12 areas. But today I would like to highlight for you-to give you
a flavor of what the report will contain-several of the challenges we have
inventoried in 4 of these areas, as well as some of the questions those
challenges prompt.

Defense Challenges	In the past 15 years, the world has experienced
dramatic changes in the overall security environment, with the focus
shifting away from conventional threats posed during the Cold War era to
more unconventional and asymmetric threats evidenced by the events of
September 11, 2001. Concerns about the affordability and sustainability of
the rate of growth in defense spending will likely prompt decision makers
to reexamine fundamental aspects of the nation's security programs, such
as how DOD plans and budgets; organizes, manages, and positions its
forces; acquires new capabilities; and considers alternatives to past
approaches. To successfully carry out this reexamination, DOD must
overcome cultural resistance to change and the inertia of various
organizations, policies, and practices that became well rooted in the Cold
War era.

While DOD has taken steps to meet short term operational needs, it still
faces the fundamental challenge of determining how it will meet the longer
term concerns of reorganizing its forces and identifying the capabilities
it will need to protect the country from current, emerging, and future
conventional and unconventional security threats. As DOD seeks to meet the
demands of the new security environment, it continues to bear the costs of
the past by maintaining or continuing to pursue many of the programs and
practices from the Cold War era. Moreover, DOD faces serious and
long-standing challenges in managing its ongoing business operations.
Complicating its efforts are numerous systems problems and a range of
other long-standing weaknesses in the key business areas of

strategic planning and budgeting, human capital management,
infrastructure, supply chain management, financial management, information
technology, weapon systems acquisition, and contracting. In fact, DOD
alone has 8 of the 25 items and shares in the 6 cross-cutting ones on our
recently-issued high-risk list.

One particular operational challenge involves managing large and growing
military personnel costs, which comprise the second largest component of
DOD's total fiscal year 2005 budget. The growth in military personnel
costs has been fueled, in part, by increases in basic pay, housing
allowances, recruitment and retention bonuses, and other special incentive
pays and allowances. Health care costs have grown to comprise a larger
share of the budget, reflecting expanded health care provided to
reservists and retirees. As the total and per capita cost to DOD for
military pay and benefits grows, we need to reexamine whether DOD has the
right pay and compensation strategies to sustain the total force in the
future in a cost-effective manner.

The foregoing challenges suggest certain key questions be considered by
policy makers.

o 	How should the historical allocation of resources across services and
programs be changed to reflect the results of a forward-looking
comprehensive threat/risk assessment as part of DOD's capabilitiesbased
approach to determining defense needs?

o 	What economies of scale and improvements in delivery of support
services would result from combining, realigning, or otherwise changing
selected support functions (e.g., combat support, training, logistics,
procurement, infrastructure, health care delivery)?

o 	How might DOD's recruitment, retention, and compensation strategies,
including benefit programs, be reexamined and revised to ensure that DOD
maintains a total military and civilian workforce with the mix of skills
needed to execute the national security strategy while using resources in
a more targeted, evidence-based and cost-effective manner?

Retirement and Disability The challenges facing retirement and disability
programs are long-term,

Challenges	severe, and structural in nature. For example, Social Security
faces a large and growing structural financing challenge. Social Security
faces this longterm financing shortfall largely because of several
concurrent demographic

trends-namely, that people are living longer, spending more time in
retirement, and having fewer children. Social Security could be brought
into balance over the next 75 years through changes in the program and
related benefits and/or taxes; however, ensuring the sustainability of the
system beyond 75 years will require even larger changes.

Beyond Social Security, our nation's retirement and disability programs
are further challenged by serious weaknesses that have become manifest in
our nation's private pension system. Despite sustained large federal tax
subsidies, total pension coverage continues to hover at about half of the
total private sector labor force. The number of traditional
defined-benefit plans has been contracting for decades, and recently, plan
terminations by bankrupt sponsors of large defined-benefit plans have
threatened the solvency of the Pension Benefit Guaranty Corporation
(PBGC), the federal agency that insures certain benefits under such
plans.14 While growth in the number and coverage of defined contribution
plans-where each worker has an individual account that receives
contributions-has helped mitigate the decline of more traditional
defined-benefit plans, these plans have also experienced problems. Policy
makers will need to consider how best to encourage wider pension coverage
and adequate and secure pension benefits, and how such pensions might best
interact with any changes to the Social Security program.

Meanwhile, federal disability programs, such as those at the Social
Security Administration (SSA) and the Department of Veterans Affairs (VA),
are challenged by significant growth over the past decade that is expected
to surge even more as increasing numbers of baby boomers reach their
disability-prone years. Federal disability programs remain mired in
concepts from the past and are poorly positioned to provide meaningful and
timely support for workers with disabilities. Advances in medicine and
science have redefined what constitutes an impairment to work, and the
nature of work itself has shifted toward service and knowledge-based
employment-these developments need to be reflected in agencies'
eligibility and review processes.

14Recognizing the long-term challenges facing PBGC, GAO has placed PBGC's
singleemployer pension program on its high-risk list of programs needing
further attention and congressional action. As of the end of fiscal year
2004, the agency's single-employer pension program registered a net
negative accumulated position of $23.3 billion.

The mounting challenges faced by our national retirement and disability
programs raise important questions. For example:

o 	How should Social Security be reformed to provide for long-term program
solvency and sustainability while also ensuring adequate benefits and
protection from disability (e.g., increase the retirement age, restructure
benefits, increase taxes, and/or create individual accounts)?

o 	What changes should be made to enhance the retirement income security
of workers while protecting the fiscal integrity of the PBGC insurance
program?

o 	How can federal disability programs, and their eligibility criteria, be
brought into line with the current state of science, medicine, technology,
and labor market conditions?

Health Care Costs, Quality, and Access Challenges

Overall health care spending doubled between 1992 and 2002 and is
projected to nearly double again in the following decade to about $3.1
trillion. Despite consuming a significant share of the economy-over 15
percent of GDP-U.S. health outcomes lag behind other major industrialized
nations. For example, the U.S. performs below par in infant mortality and
life expectancy rates as well as premature and preventable deaths. At the
same time, access to basic health care coverage remains an elusive goal
for nearly 45 million Americans without insurance. Americans with good
health insurance have access to advanced technology procedures and
world-class health facilities, but clinical studies suggest that not all
of this care is desirable or needed. Rising health costs are compelling
both public and private payers to examine whether these procedures can
continue to be financed without better accounting for their clinical
effectiveness. Additional health care spending over time will draw
resources away from other economic sectors and could have adverse economic
implications for all levels of government, individuals, and other private
purchasers of health care. Defining differences between needs, wants,
affordability, and sustainability is fundamental to rethinking the design
of our current health care system.

In the past several decades, the responsibility for financing health care
has shifted away from the individual patient. In 1962, nearly half-46
percent- of health care spending was financed by individuals. The rest was
financed by a combination of private health insurance and public programs.
By 2002, the amount of health care spending financed by individuals'
out-of-pocket

spending-at the point of service-was estimated to have dropped to 14
percent. Tax preferences for insured individuals and their employers have
also shifted some of the financial burden for private health care to all
taxpayers. Tax preferences can work at cross-purposes to the goal of
moderating health care spending. For example, the value of employees'
health insurance premiums are permitted to be excluded from the
calculation of their taxable earnings and are also excluded from the
employers' calculation of payroll taxes for both themselves and their
employees. These tax exclusions represent a significant source of foregone
federal revenue.

Public and private payers are experimenting with payment reforms designed
to foster delivery of care that is clinically proven to be effective.
Ideally, identifying and rewarding efficient providers and encouraging
inefficient providers to emulate best practices will result in better
value for the dollars spent on care. However, the challenge of
implementing performance-based payment reforms, among other strategies, on
a systemwide basis will depend on system components that are not currently
in place nationwide-such as compatible information systems to facilitate
the production and dissemination of medical outcome data, safeguards to
ensure the privacy of electronic medical records, improved transparency
through increased measurement and reporting efforts, and incentives to
encourage adoption of evidence-based practices. These same system
components would be required to develop medical practice standards, which
could serve as the underpinning for effective medical malpractice reform.

In meeting these pressing health care system challenges, the following
questions might be considered.

o 	How can technology be leveraged to reduce costs and enhance quality
while protecting patient privacy?

o 	How can health care tax incentives be designed to encourage employers
and employees to better control health care costs? For example, should tax
preferences for health care be designed to cap the health insurance
premium amount that can be excluded from an individual's taxable income?

o 	How can "industry standards" for acceptable care be established, and
what payment reforms can be designed to bring about reductions in
unwarranted medical practice variation? What can or should the federal

government do to promote uniform standards of practice for selected
procedures and illnesses?

Tax System Challenges	As I discussed earlier, the imbalance between
federal revenues and expenditures, if allowed to persist long term, will
affect economic growth and require greater scrutiny of both tax revenues
and expenditures. The level and types of taxes have major impacts on the
financing of government, as well as on the economy as a whole and on
individual taxpayers, for both today and tomorrow.

The success of our tax system hinges greatly on the public's perception of
its fairness and understandability. Compliance is influenced not only by
the effectiveness of IRS's enforcement efforts, but also by Americans'
attitudes about the tax system and the government. Disturbing recent polls
indicate that about 1 in 5 respondents say it is acceptable to cheat on
their taxes. Furthermore, the complexity of and frequent revisions to the
tax system make it more difficult and costly for taxpayers who want to
comply to do so, and for IRS to explain and enforce tax laws. Many argue
that complexity creates opportunities for tax evasion-through vehicles
such as tax shelters-which, in turn, motivate further changes and
complexity in tax laws and regulations. The lack of transparency also
fuels disrespect for the tax system and the government. Thus, a crucial
challenge for reexamination will be to determine how we can best
strengthen enforcement of existing laws to give taxpayers confidence that
their friends, neighbors, and business competitors are paying their fair
share.

The growing complexity of the tax system stems in part from the extensive
use of tax incentives to promote social and economic objectives. The tax
system includes hundreds of billions of dollars in such incentives-the
same magnitude as total discretionary spending-yet relatively little is
known about the effectiveness of tax incentives in achieving the
objectives intended by the Congress. Furthermore, as you know, tax
incentives are off the radar screen for the most part and do not compete
in the budget process. They are effectively "fully funded" before any
discretionary spending is considered. Incentives for savings are a
particular concern: Private sector savings are near historical lows, and
government savings, due to federal budget deficits, are negative. In
addition, these incentives are complex, and although the issue is not
completely settled, research has suggested that the incentives often do
not stimulate much, if any, net new saving by individuals. As far back as
1994, we have reported that tax incentives deserved more scrutiny.

The debate about the future tax system is partly about whether the goals
for the nation's tax system can be best achieved using the current
structure, which is heavily dependent on income taxes, or a fundamentally
reformed structure, which might include more dependence on consumption
taxes, a flatter rate schedule, and/or fewer tax preferences. Increasing
globalization, which makes it easier to move assets, income, and jobs
across international borders, is another motivator for the debate. As
policy makers grapple with such issues, they will have to balance multiple
objectives, such as economic growth, equity, simplicity, transparency, and
administrability, while raising sufficient revenue to finance government
spending priorities. The appropriate balance among these objectives may
also be affected by (1) how, if at all, to take into account that,
including both the employer and employee share, an estimated two-thirds of
taxpayers would pay more in payroll taxes-which are levied to fund Social
Security and Medicare benefits-than they would pay in income taxes in 2004
and (2) whether and how to tax wealth.

Today's pressing tax challenges raise important questions. For example:

o 	Given our current tax system, what tax rate structure is more likely to
raise sufficient revenue to fund government and satisfy the public's
perception of fairness?

o 	Can we increase compliance with tax laws and reduce the need for IRS
enforcement through greater use of withholding and information reporting?
Could increased disclosure and penalties reduce the use of abusive tax
shelters?

o 	Which tax incentives need to be reconsidered because they fail to
achieve the objectives intended by the Congress, their costs outweigh
their benefits, they duplicate other programs, or other more cost
effective means exist for achieving their objectives?

o 	Should the basis of the existing system be changed from an income to a
consumption base? Would such a change help respond to challenges posed by
demographic, economic, and technological changes? How would such a change
affect savings and work incentives? How would reforms address such issues
as the impact on state and local tax systems and the distribution of
burden across the nation's taxpayers?

Where Do We Go From Here?

Congress faces a challenge many would find daunting: the need to bring
government and its programs in line with 21st century realities. This
challenge has many related pieces: narrowing the long-term fiscal gap;
adapting Social Security to meet the new demographic reality; tackling the
challenge of health care access, cost and quality; deciding on the
appropriate role and size of the federal government-and how to finance
that government-and bringing the panoply of federal activities into line
with today's world. We believe that we at GAO have an obligation to assist
and support the Congress in this effort. The reexamination questions
discussed today and the forthcoming report of which they are a part are
offered in that spirit: they are drawn primarily from the work GAO has
done for the Congress over the years. We have attempted to structure
questions that we hope you will find useful as you examine and act on
problems that may not constitute an urgent crisis but pose important
longer term threats to the nation's fiscal, economic, security and
societal future.

Although it is not easy, the periodic reexamination of existing portfolios
of federal programs can weed out ineffective or outdated programs while
also strengthening and updating those programs that are retained. Such a
process not only could address fiscal imbalances, but also improve the
responsiveness, effectiveness, and credibility of government in addressing
21st century needs and challenges. Given the unsustainability of our
current fiscal outlook, the real question is not whether we will deal with
the fiscal imbalance, but how and when.

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.

We recognize that this will not be a simple or easy process-there are no
"quick fixes." Such a process reverses the focus of traditional
incremental reviews, where disproportionate scrutiny is given to proposals
for new programs or activities, but not to those that are already in the
base. Taking a hard look at existing programs and carefully reconsidering
their goals and their financing is a challenging task. Reforming programs
and activities

leads to winners and losers, notwithstanding demonstrated shortfalls in
performance and design. Given prior experience and political tendencies,
there is little real "low-hanging fruit" in the federal budget.
Across-theboard approaches to fiscal challenges may be easier in the short
run, but they do not address the longer term fiscal cost drivers and cut
both effective and ineffective programs alike.

Given the severity of the nation's fiscal challenges and the wide range of
federal programs, the hard choices necessary to get us back on track in a
sustainable manner may take a generation to address. Beginning the
reexamination and review process now would enable decision makers to be
more strategic and selective in choosing areas for review over a period of
years. Reexamining selected parts of the budget base, over time rather
than all at once, will lengthen the process, but it may also make the
process more feasible and less burdensome for decision makers. And by
phasing in changes to programs or policies that might otherwise have
prohibitively high costs of transition, the impact can be spread out over
longer time periods.

Although reexamination is never easy, the effort is not without precedent.
The federal government, in fact, has reexamined some of its programs and
priorities episodically in the past. Programmatic reexaminations have
included, for example, the 1983 Social Security reform, the 1986 tax
reform, and the 1996 welfare reform. They have also included reforms such
as the creation of the Department of Homeland Security and, most recently,
the ongoing reorganization of the U.S. intelligence community. From a
broader fiscal standpoint, the 1990s featured significant
deficit-reduction measures adopted by the Congress and supported by the
President that made important changes to discretionary spending,
entitlement program growth, and revenues that helped eliminate deficits
and bring about budgetary surpluses. States and other nations also have
engaged in reexamination exercises.

In our system, a successful reexamination process will in all likelihood
rely on multiple approaches over a period of years. The reauthorization,
appropriations, oversight, and budget processes have all been used to
review existing programs and policies. Adding other specific approaches
and processes-such as temporary commissions to develop policy
alternatives-has been proposed.

Fortunately the Government Performance and Results Act (GPRA) of 1993 and
other result-oriented management laws enacted over the last 12 years

have built a base of performance information that can assist the Congress
and the President in this effort. In the last few years, OMB has been
working to rate the effectiveness of programs under the program assessment
rating tool (PART). There are also many nongovernmental sources of program
evaluation and analysis. And, finally, Congress has its own analytic
support-your staff and that of the Congressional support agencies. As
always, GAO stands ready to assist the Congress as it develops its agenda
and to help answer any of the questions the Congress wishes to pursue.

Mr. Chairman, Senator Conrad, and Members of the Committee this concludes
my testimony. I would be happy to answer any questions you may have.

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