21st Century Challenges: Reexamining the Base of the Federal	 
Government (16-FEB-05, GAO-05-352T).				 
                                                                 
This report stems from the recognition that the Congress faces a 
daunting challenge: the need to bring government and its programs
in line with 21st century realities. This challenge has many	 
related pieces: addressing the nation's large and growing	 
long-term fiscal gap; 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. The reexamination questions discussed in
this report are drawn primarily from the work GAO has done for	 
the Congress over the years. Many of these questions do not	 
represent immediate crises, however many pose important 	 
longer-term threats to the country's fiscal and economic, and	 
national security as well as the quality of life for our children
and grandchildren.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-352T					        
    ACCNO:   A17846						        
  TITLE:     21st Century Challenges: Reexamining the Base of the     
Federal Government						 
     DATE:   02/16/2005 
  SUBJECT:   Budget deficit					 
	     Deficit reduction					 
	     Economic policies					 
	     Financial management				 
	     Fiscal policies					 
	     Internal controls					 
	     Performance measures				 
	     Policy evaluation					 
	     Program evaluation 				 
	     Program management 				 
	     Strategic planning 				 
	     Future budget projections				 
	     Economic indicators				 
	     Medicaid Program					 
	     Medicare Program					 
	     Social Security Program				 
	     Gross Domestic Product				 

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GAO-05-352T

United States Government Accountability Office

                                 GAO Testimony

Before the Senate Committee on Homeland Security and Governmental Affairs

For Release on Delivery
Expected at 10:00 am EST 21st CENTURY
Wednesday, February 16, 2005

                                   CHALLENGES

                            Reexamining the Base of
                             the Federal Government

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

                                       A

GAO-05-352T

Chairman Collins, Senator Lieberman and Members of the Committee:

Thank you for the opportunity to present and discuss the report we are
issuing today entitled 21st Century Challenges: Reexamining the Base of
the Federal Government. We appreciate the interest and support of this
committee and others of GAO's efforts to produce this report for the
Congress. This report stems from the recognition that the Congress faces a
daunting challenge: the need to bring government and its programs in line
with 21st century realities. This challenge has many related pieces:
addressing our nation's large and growing long-term fiscal gap; 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 GAO has an obligation to
assist and support the Congress in this effort. The reexamination
questions discussed in today's report 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 the Congress determines which issues it plans to examine and act
on. Many of the questions in this report do not represent immediate
crises, however many pose important longer term threats to our country's
fiscal and economic, and national security as well as the quality of life
for our children and grandchildren.

As I have said before, our nation is on an unsustainable fiscal path.
Longterm 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. All reasonable 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
ensure that our programs and priorities respond to emerging social,
economic, and security changes and challenges.

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. It will also involve how the government should
conduct its business for the 21st century. 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. 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 aging of our
population, the globalization of economic transactions, the significant
advances in technology, and changing security threats. If government is to
effectively address these trends, it cannot accept its existing programs,
policies and activities as "givens." Outmoded commitments and operations
can constitute an encumbrance on the present and future that can erode the
capacity of the nation to better align its government with the needs and
demands of a changing world and society.

Rethinking the base of existing federal spending and tax programs is an
important step in this process. A periodic reexamination offers the
prospect of addressing emerging needs by weeding out programs and policies
that are outdated and ineffective. Those programs that remain relevant can
be updated and modernized by improving their targeting and efficiency
through such actions as redesigning allocation and cost sharing
provisions, consolidating facilities and programs and streamlining and
reengineering operations and processes. The tax policies and programs
financing the federal budget can also be reviewed with an eye toward the
overall level of revenues that are necessary to fund government operations
and commitments, the mix of taxes that should be used, and the extent to
which the tax code is used to promote certain societal objectives.

In my testimony today I will try to provide a context for, and a guide to,
this report. First, I will talk about why and how we developed this
report. Next, I will touch on the long-term fiscal challenge, which
provides the primary impetus for this overall reexamination effort. The
bulk of my statement deals with five of the fundamental trends that are
shaping the world and the federal role in our economy and our society:
demographics, global interdependence, economic change, evolving security
threats and governance challenges. In this discussion I'll talk about how
the issues discussed in this report can be used to assist you in your
policy making and oversight activities.

Reexamining the Base Let me start by telling you a little more about the
genesis of this report.

GAO has long had a statutory responsibility for monitoring the nation'sof
the Federal finances. Recently, in our role as the auditor of the U.S.
government's Government consolidated financial statements, we included an
emphasis paragraph in

the audit report for fiscal year 2004 expressing our concerns about the
unsustainability of the nation's long-term fiscal outlook. This conclusion

was based on the results of fiscal year 2004 and GAO's long-term budget
model, which we have used since 1992.

Moreover, as you know, in our role as the audit, evaluation, and
investigative arm of the Congress, we have provided our perspectives on a
wide range of key performance and accountability challenges facing the
federal government, both in numerous reports and testimonies over the
years and compendiums such as our high-risk reports. We have also looked
forward by developing a strategic plan, consistent with the Government
Performance and Results Act (GPRA) and in consultation with the Congress,
identifying the emerging forces and trends that are impairing the United
States, its citizens and its position in the world.

Given these trends and challenges facing the nation, we believe that GAO
now has an obligation to provide policymakers with the benefit of our
institutional knowledge to identify selected areas throughout government
that could be considered for reexamination and review. Drawing on our past
and pending work-about 90 percent of which is either requested by the
Congress or required by law-we have provided examples of the kinds of hard
choices stemming from these challenges in the form of questions for
elected officials and other policy makers to consider. These 21st century
questions cover discretionary spending, mandatory spending including
entitlements, as well as tax policies and programs.

The specific 21st century questions were based, in part, on GAO's
strategic plan for serving the Congress,1 which identified major trends
that will shape the federal role in the future. (See table 1.)

                         Table 1: 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.

1 GAO, Strategic Plan for Serving the Congress and the Nation, 2004-2009
(Washington, D.C.: March 2004).

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
which are useful for reviewing any government program or activity; these
are displayed in table 2.

              Table 2: Illustrative Generic Reexamination Criteria

Relevance of Does it relate to an issue of nationwide interest? If so, is
a federal role purpose and warranted based on the likely failure of
private markets or state and local the federal role 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 re-prioritization 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 How does it measure success? Are the measures reasonable and

success	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 Is it well targeted to those with the greatest needs and the
least capacity benefits

                              to meet those needs?

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

effectiveness	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?

                         (Continued From Previous Page)

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 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 as listed in table 3.

               Table 3: Twelve Reexamination Areas Mission Areas

Defense
Education & Employment
Financial Regulation & Housing
Health Care
Homeland Security
International Affairs

Natural Resources, Energy & Environment

Retirement & Disability

Science & Technology

Transportation

Crosscutting Areas

                             Governance Tax System

Source: GAO.

Our report contains over 200 individual illustrative questions in these 12
areas. In the remainder of my statement I will discuss some of the
questions in the context of the major strategic challenges facing the
nation.

Long-term Fiscal Challenge Provides Reexamination Impetus

Chairman Collins, the nation is facing a range of important new forces
that are already working to reshape American society, our place in the
world and the role of the federal government. Our capacity to address
these and other emerging needs and challenges will be predicated on when
and how we deal with our fiscal challenges-the long-term fiscal pressures
we face are daunting and unprecedented in the nation's history. The size
and trend of our projected longer term deficits means that the nation
cannot ignore the resulting fiscal pressures-it is not a matter of whether
the nation deals with the fiscal gap, but when and how. Unless we take
effective and timely

action, our near-term and longer-term deficits present the prospect of
chronic and seemingly perpetual budget shortfalls and constraints becoming
a fact of life for years to come. Not only would continuing deficits eat
away at the capacity of everything the government does, but they will
erode our ability to address the wide range of emerging needs and demands
competing for a share of a shrinking budget pie.

GAO's long-term simulations illustrate the magnitude of the fiscal
challenges we will face in the future. Figures 1 and 2 present these
simulations under two different sets of assumptions. In the first,
simulation is based on the CBO January baseline-constructed according to
the statutory requirements for that baseline.2 Consistent with these
requirements, this simulation assumes no changes in current law, that
discretionary spending is assumed to grow with inflation for the first 10
years, and that tax cuts which are currently scheduled to expire will
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, only two assumptions are changed: (1) discretionary
spending is assumed to grow with the economy rather than merely with
inflation for the entire period (not just after 2015), and (2) all tax
cuts which are currently scheduled to expire are made permanent. 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.

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

Figure 1: Composition of Spending as a Share of Gross Domestic Product
(GDP) Under Baseline Extended

                                       50

                                       40

                                       30

                                       20

                                       10

                                       0

Percent of GDP

2004 2015 2030 2040 Fiscal year

All other spending	Medicare & Medicaid	Social Security	Net interest	

Source: GAO's January 2005 analysis.

Notes: 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 mininum tax (AMT), and (3)
increased revenue from tax-deferred retirement accounts. After 2015,
revenue as a share of GDP is held constant.

Figure 2: 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

                                       50

                                       40

                                       30

                                       20

                                       10

                                       0

Percent of GDP

2004 2015 2030 2040 Fiscal year

All other spending	Medicare & Medicaid	Social Security	Net interest	

Source: GAO's January 2005 analysis.

Notes: 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 and/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 likely 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 in the future-and that seems both inappropriate and
implausible. Accordingly, substantive reform of Social Security, Medicare
and other major mandatory programs remains critical to recapturing our
future fiscal flexibility.

The government can help ease our nation's future fiscal burdens through
actions on the spending and/or revenue side that reduce debt held by the
public, increase saving for the future, and enhance 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.

Fundamental Forces Will Test Existing Policy Frameworks

Fiscal necessity can become the mother of invention and of much needed
reforms in government programs and activities. The nation's continued
economic progress, social well being and national security in the 21st
century will in large part depend on how we adapt and respond to these
rapid changes and growing fiscal challenges.

We hope the reexamination questions presented in our report today can
facilitate a fundamental overview and reexamination of the base of
government programs, policies and activities. As I noted earlier, in
organizing these questions we started with major trends that are shaping
the world and the federal role in our economy and our society. I'd like to
spend some time today discussing five of the trends we have identified in
our strategic plan for serving the Congress and how they prompt the need
to consider the base of government across several of the 12 areas
addressed in the report. I'll start with demographics, including the aging
of our population, and then discuss increasing global interdependence,
economic change, evolving security threats and changing governance
systems.

An Aging Population	As the baby boomers age, people will live longer and
spend more time in retirement. As shown in figure 3, the U.S. elderly
dependency ratio is expected to continue to increase.3 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 one elderly dependent for every three people of
working age4-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 3: U.S. Elderly Dependency Ratio Expected to Continue to Increase

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

4 For the Social Security system-which does not cover the entire U.S.
population-the ratio of beneficiaries to workers is estimated to be 1 to 2
at that time.

A falling fertility rate is the other principal factor underlying the
growth in the elderly share of the population. In the 1960s, the fertility
rate was an average of three children per woman. Today it is a little over
two, 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. 4.) 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.

Figure 4: 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.

As noted earlier, these trends have major implications for federal budget
policy and will prompt a reexamination of national retirement programs,
health care and workforce policies. 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 for the
economy as a whole. Figure 5 shows the total future draw on the economy
represented by Social Security, Medicare, and Medicaid. Under the 2004
Trustees' intermediate estimates and CBO's long-term 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 5: Social Security, Medicare, and Medicaid Spending as a Percent of
GDP

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.

These trends portend major changes in our current national social
insurance system. A core element of the system was a certain and secure
retirement income component-with Social Security as a foundation. Social
Security is intended to be supplemented by a private pension system and
individual savings arrangements-which, in combination, sought to conquer
the long-standing economic fear of poverty in old age. Effectively
responding to the long-term and structural challenges discussed above will
entail fundamental and comprehensive reassessment of each of the key
components of our retirement and disability system.

Social Security could be brought into balance over the next 75 years in
various ways. If reforms were to be instituted today, an immediate
increase in payroll taxes of 15 percent or an immediate reduction in
currently promised benefits of 13 percent, or some combination of the two
would be

required to bring the program into balance. Waiting to reform the system
will require even greater changes as time passes. Encouraging older
workers to extend their labor force participation can also improve the
solvency and sustainability of the program while enhancing overall
economic growth.

Weaknesses in the nation's private pension system have also become
evident. Traditional defined benefit plans where employers rather than
employees bear the risk of investment have been shrinking for decades, and
recent terminations of plans have threatened the solvency of the Pension
Benefit Guaranty Corporation (PBGC). Policymakers will need to consider
how to best encourage wider pension coverage and enhance pension security.
They will also need to consider how the private pension system and any
related reforms will interact with prospective changes in Social Security.

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.

Although Social Security is currently the largest program in the federal
budget, it will soon be eclipsed by Medicare and Medicaid, which are fast
growing programs in the federal budget both now and over the longer term.
Many policymakers, industry experts, and medical practitioners contend
that the U.S. health care system-in both the public and private sectors-is
in crisis. Long-term health spending growth in Medicare and Medcaid is
driven by both the aging of the population and the rapid growth of health
care costs. In the private sector, employers and other private purchasers
of health care services find that the soaring cost of health insurance
premiums poses a threat to their competitive position in an increasingly
global market.

Despite the significant share of the economy consumed by health care, a
number of key U.S. health outcomes continue to lag behind other

industrialized nations. The United States now spends over 15 percent of
its gross domestic product on health care-far more than other major
industrialized nations. Yet relative to these nations, the United States
performs below par in such measures as rates of infant mortality, life
expectancy, and premature and preventable deaths. Moreover, evidence
suggests that the American people are not getting the best value for their
health care dollars. Studies show that quality is uneven across the
nation, with a large share of patients not receiving clinically proven,
effective treatments. At the same time, access to basic health care
coverage remains an elusive goal for nearly 45 million Americans without
insurance, with a growing percentage of workers losing their
employer-based coverage. Many more millions of Americans are underinsured
or have lost some of the benefits their health plans previously afforded.

The policy process will be challenged to fundamentally rethink the design
of our health care system. Defining differences between wants, needs,
affordability, and sustainability will be fundamental to rethinking the
design of our current health care system. Among the areas that should be
on the table is how to balance responsibility for financing health care
among government at all levels, employers and individuals. In the past
several decades, the responsibility for financing health care at the point
of delivery has shifted away from the individual patient, falling from
nearly half-46 percent-of health care spending 40 years ago to 14 percent
today. Tax preferences for insured individuals and their employers have
also shifted some of the financial burden for private health care to all
taxpayers. Tax policies permit the value of employees' health insurance
premiums to be excluded from the calculation of their taxable earnings and
exclude the value of the premium from the employers' calculation of
payroll taxes for both themselves and employees. These tax exclusions
represent a significant source of forgone federal revenue and work at
cross-purposes to the goal of moderating health care spending. Health
savings accounts and other consumer-directed plans, which shift more of
health financing to the individual, also have been accorded various tax
preferences.

Promoting consistent quality of care is another challenge facing the
health care system. Public and private payers are experimenting with
payment reforms designed to foster the 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,
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 insure 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 while reducing costs and improving quality of care. Policymakers
would need to consider the extent to which federal leadership could foster
these system components.

As the foregoing suggests, the aging population will have profound
implications for our policies and programs. The following kinds of
questions illustrate the kinds of choices we face:

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

o 	Labor Force-How can existing policies and programs be reformed to
encourage older workers to work longer and to facilitate phased retirement
approaches to employment (for example, more flexible work schedules or
receiving partial pensions while continuing to work)?

o 	Private Pensions-What changes should be made to enhance the retirement
income security of workers while protecting the fiscal integrity of the
PBGC insurance program (for example, increasing transparency in connection
with underfunded plans, strengthening pension funding rules, modifying
PBGC's premium structure and insurance guarantees, or restricting benefit
increases and the distribution of lump sum benefits in connection with
certain underfunded plans)?

o 	Disability programs-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?

o 	Health care reform-How can we perform a systematic reexamination of our
current health care system? For example, could public and private entities
work jointly to establish formal reexamination processes that would (1)
define and update as needed a minimum core

of essential health care services, (2) ensure that all Americans have
access to the defined minimum core services, (3) allocate responsibility
for financing these services among such entities as government, employers,
and individuals, and (4) provide the opportunity for individuals to obtain
additional services at their discretion and cost?

o 	Health care financing-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 	Health care quality-How can industry standards for acceptable care be
established and payment reforms be designed to bring about reductions in
unwarranted medical practice variation? For example, what can or should
the federal government do to promote uniform standards of practice for
selected procedures and illnesses?

                       Increasing Global Interdependence

The rapid increase in the movement of economic and financial goods,
people, and information around the world demonstrates that the nation is
no longer self-contained, either in its problems or their solutions. The
growing interdependence of nations-globalization-has brought clear
economic and social benefits. But while the world has "gotten smaller," it
has raised new challenges for policymakers that require the nation to be
involved in or respond to events outside its borders.

One measure of growing worldwide interdependence is the total share of
world goods and services that is traded. As shown in figure 6, from 1970
through 2005, world exports increased from about 12 percent to about 28
percent of world GDP. Hence, all over the world, people are depending more
and more on other nations to consume the goods they produce and to produce
the goods they in turn consume.

Figure 6: World Exports of Goods and Services as a Share of World GDP,
1970-2004

Percent of world GDP

30

25

20

15

10

5

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: International Monetary Fund, World Economic Outlook Database,
September 2004

In addition, the internationalization and liberalization of financial
markets worldwide, along with growing wealth in many countries, have
fueled huge increases in cross-border investments. Information is also
moving across borders, as indicated by the rapid adoption of the use of
the Internet-from 1991 through 2001 the number of Internet users increased
from 4.4 million to 502 million.

Increased global interdependency and rapid technological advancement in
the financial services industry pose significant challenges to U.S.
regulatory institutions. The present federal financial regulatory
structure evolved largely as a result of periodic ad hoc responses to
crises such as financial panics. Thus the current regulatory structure
includes numerous regulators that specialize in areas such as banking,
securities, futures, and insurance but that have difficulty seeing the
total risk across industry lines of the entities they regulate. In the
last few decades, however, the financial services industry, especially as
represented by the largest firms, has evolved, becoming more global, more
concentrated, complex, and consolidated across sectors, and increasingly
converging in terms of product offerings. Consumers are faced with an
increasingly complicated array of options for managing their personal
finances and selecting investments and credit products. Individuals can
also invest in companies worldwide and can be defrauded or have their
identities stolen from almost anywhere.

The shift to a global economy is challenging customary federal approaches
to education and employment. The global economy, advances in technology,
and the availability of foreign workers, enable work to be shifted to
other countries or render some U.S. jobs obsolete. If we are to compete
effectively, our educational system must provide the means for adults to
continue to learn new skills and enhance their existing abilities and
competitive posture. As an increasingly volatile job market creates and
eliminates jobs, federal programs that train new workers or support
workers who lose their jobs must also be capable of responding to sudden
changes in the economy. It will also be important to consider whether the
number of visas allowed for both employment and education may affect
long-term competitiveness, and our ability to build bridges with other
nations, their people, and their cultures while also addressing our
national and homeland security needs.

Global and shifting trade patterns create a range of challenges for
policymakers. The high level of U.S. trade deficits, rapid increases in
imports from nations such as China, and the increase in services trade
have led to questions about the best way to ensure that trade is fair and
contributes to the well-being of Americans. The globalization of economic
activity is bringing an increasing share of the U.S. economy under the
domain of international agreements. Economic activity historically viewed
as isolated from international trade agreements, such as local government
procurement practices, may come under the scrutiny of other parties to the
trade agreements, and increasingly be subject to their enforcement
machinery.

The U.S. position in the worldwide economy has fundamentally changed, and
increasing globalization and the shifting of business income overseas
prompts questions about the adminstrability and sustainability of our
current income-based tax system. Furthermore, the Internal Revenue Service
faces significant tax enforcement challenges. The tax gap-the difference
between what taxpayers annually report and pay and what they should have
reported and paid in taxes-was estimated at over $300 billion in 2001, and
IRS has been challenged in recent years to assess and collect taxes
stemming from increasingly complex international business activity and
transactions. The ongoing debate over tax system reform is partly about
whether the tax revenues needed to fund the federal government can best be
raised using the current structure, which is heavily dependent on income
taxes, or a fundamentally different structure, which might include more
dependence on consumption taxes. As policymakers grapple with such issues,
they will have to balance multiple objectives such as economic

growth, equity, effectiveness, simplicity, transparency, fairness, and
administrability while raising the needed revenue.

As the foregoing suggests, globalization will have profound implications
for our policies and programs. The following kinds of questions illustrate
the kinds of choices we face:

o 	Financial regulation-Is it time to modernize our financial regulatory
system by consolidating various federal regulatory agencies to promote a
more coherent and integrated structure while specifying federal goals more
clearly?

o 	Financial literacy-What role should the federal government take in
improving financial literacy among consumers, and what are the most
effective strategies for doing so?

o 	Workforce retraining-Do current workforce retraining programs provide
adequate incentives to help the United States develop lifelong learning
strategies and proactive training programs? Should current federally
funded training programs operated across multiple federal agencies-9
federal agencies administer 44 such programs-be better integrated and
restructured to increase their cost effectiveness?

o 	Domestic subsidies-Do current federal agricultural policies and
programs, which largely rely on subsidies, contribute to unfair trade? In
addition, do current policies remain relevant to the modern agricultural
sector?

o 	Tax enforcement-How can we best strengthen enforcement of tax laws to
give taxpayers confidence that their friends, neighbors, and business
competitors are paying their fair share?

o 	Taxation of international transactions-Is the federal income-based tax
system sustainable and administrable in a global economy? How should we
tax the income of U.S. multinational corporations that is earned outside
of the United States?

o 	Tax system base-To what extent 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 reforms address such issues as

the impact on state and local tax systems and the distribution of burden
across the nation's taxpayers?

Promoting Economic Growth in a Knowledge-Based Society

Many of the issues facing the Congress and the nation stem from complex
and evolving domestic and global economies. Ultimately, sustaining and
increasing economic growth over the longer term is essential to provide
resources for a smaller cohort of workers to support an aging society. The
nation's shift to a knowledge-based economy has underscored the importance
of science and technology for economic growth and productivity and has
placed greater emphasis on public policies that rely on market forces and
competition. Over the longer term, 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.

The move away from the nation's traditional, manufacturing-based economy
toward one characterized by the production of information, knowledge and
services has contributed to a resurgence of productivity growth. Labor
productivity growth accelerated from 1.6 percent per year in the early
1990s to 2.9 percent per year from 1996 through 2003.

Sustaining this relatively high rate of productivity will present
challenges to policymakers. Because intellectual assets are the
underpinning of a knowledge-based economy, investment in human capital is
fundamental to continued growth. For policymakers, this shift requires
greater attention to education and training, both for children and adults.
New importance will need to be given to continuing education and training
for adults, whose longer life expectancies will allow them to stay in the
workforce longer. The shift to a knowledge-based economy also has
implications for immigration policy. The emergence of technology-oriented
industries has created growing reliance on workers from other countries,
working either in the United States or in their home countries. In light
of heightened concern for homeland security, the flow of workers into the
country is being reassessed.

Other key factors that drive sustained growth in the changing economy
include research and development expenditures, trade openness, and
effective public and private infrastructure. Advances in science and
technology in the United States, along with the nation's strong research
and development infrastructure and intellectual property protections, have
long ensured the United States a leadership position in the development
and commercialization of scientific advances and have helped nurture

entrepreneurship and dissemination of information on new technologies.
However, other nations are gaining in their research infrastructure and
are beginning to challenge the preeminent position of the United States,
challenging policymakers to further stimulate greater private research and
collaborative scientific initiatives. Information technology advancements
have contributed to substantial gains in U.S. productivity, but
interconnectivity has also raised the potential for unauthorized access to
personal and confidential data and created new vulnerabilities to the
nation's critical operations and the infrastructures they support.

Effective public infrastructure is also an important underpinning for
longterm growth. Increasing passenger and freight travel has led to
growing congestion, and policymakers face the challenge of promoting more
integrated, intermodal transportation systems. Transcending the boundaries
of levels of government, as well as separate funding streams for different
modes, will be essential if we are going to provide efficient movement of
goods and people for a 21st century economy.

Underlying land use planning practices can both reflect transportation
policies as well as further exacerbate mobility challenges. Specifically,
sprawling development places undue stress on transportation systems, as
well as on energy, water, and the environment. In many parts of the
country, water shortages are expected over the next 10 years, which will
necessitate difficult tradeoffs between competing claimants for this
increasingly scarce resource.

The sustainability of economic growth and higher productivity levels also
depend in large part on our national saving. Saving and investment drive
the productivity growth that allows personal incomes to rise without
accelerating inflation. However, national saving remains at both
historically and comparably 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 generally
steadily declined. (See fig. 7.)

Figure 7: Personal Saving Rate Has Steadily Declined

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 plummeted, 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 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.

The foregoing suggests that changing economic trends and related forces
will have important implications for federal policies and activities, as
illustrated by the following questions:

o 	Immigration and workforce-How can the United States balance immigration
policies, such as worker and student visa programs, to address the need
for workers with technical skills and the nation's need to maintain global
preeminence in higher education, science and emerging homeland security
requirements?

o 	Research and development-Are different kinds of federal incentives
needed to encourage greater private sector collaboration and nurture
interdisciplinary research and development? For example, to what extent
does the current research tax credit actually stimulate private sector
research spending that would not have occurred otherwise?

o 	Transportation-Do the existing tools and delivery mechanisms, such as
existing trust funds dedicated to certain modes of transportation, have
the ability to provide intermodal, efficient, cost-effective solutions to
mobility and security challenges?

o 	Land use planning-Can alternative federal approaches to transportation,
land management and water policies be adjusted to better promote
sustainable management of our nation's land and water resources? For
example, given projected water supply shortages, is there a need to
reassess the balance between urban expansion in waterscarce regions and
the continuance of existing crop irrigation practices?

o 	Personal savings-Could the myriad savings incentives (for example,
IRA's, health savings accounts, education savings incentives, etc.) that
complicate the current tax system be consolidated and simplified while
promoting increased savings?

Changing Security Threats	The United States is militarily unchallenged and
probably will be for the foreseeable future. Since the demise of the
Soviet Union and the end of the Cold War, the United States has emerged as
the dominant military, political and economic power in the world. Yet in
the past 15 years, the world has experienced dramatic changes in the
overall security environment. The focus has shifted from conventional
threats posed during the Cold War era to more unconventional and
asymmetric threats which take advantage of the individual freedoms we
enjoy, as evidenced in the events of September 11, 2001.

In response to these changing threats, the Congress has taken a number of
steps including (1) increased funding for the Department of Defense (DOD)

(See fig. 8.), (2) created the Department of Homeland Security (DHS), (3)
provided increased funding for DHS and other federal agencies responsible
for domestic homeland security, notably for border and transportation
security, and (4) restructured intelligence activities. The Congress faces
the difficult task of integrating and balancing fighting terrorism abroad
and meeting the requirements for homeland security with other domestic
priorities all the while protecting American liberties.

Figure 8: Growth in Budget Authority for Department of Defense Fiscal
Years 20012004

Billions

500 490

400

300

200

100

0 2001 2002 2003 2004

Regular

Supplemental

Source: Office of Management and Budget, Budget of the United States
Government, Fiscal Year 2006(February 2005).

Note: Supplementals are for defense and other global war on terror.

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.

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.

The threat of terrorism will persist well into the 21st century.
Terrorists are dispersed in loosely organized, self-financed,
international networks, some of which are cross-national. Domestic
terrorist groups remain a security threat, though currently to a much
lesser extent than the international terrorist movement. We must
fundamentally reexamine our approaches to terrorism and homeland
security-the nature of the terrorist threat, its long-term impact, and the
impact of our strategies. While most believe we are safer than we were on
the day of the September 11 attacks, we still are not safe. As the Gilmore
and 9/11 Commissions pointed out, the nation will never be completely safe
and total security is an unachievable goal.

To adapt national strategies to address current and future threats to
homeland security, it will be imperative to define an acceptable,
achievable, and affordable level of risk. Security risks have been exposed
in many aspects of normal life, with perhaps many of the greatest dangers
posed in areas that Americans have simply taken for granted, such as air
and water supplies, food production chains, information systems, airports
and train stations, ports, borders, and shopping malls. However, we cannot
afford to protect everything against all threats-choices must be made
about protection priorities given the risk and how to best allocate
available resources. While risk-based allocation decision making is still
evolving, we must take a more systematic, reasonable and responsible
approach to allocating resources.

Another crucial challenge to addressing security risks across the nation
is establishing effective federal, state, and local government; private
sector;

nongovernmental; and nation-state partnerships. The Constitution requires
the federal government to "provide for the common defense" and to "repel
invasions." Many would interpret those requirements to justify homeland
security and related counterterrorism activities as an inherently
governmental obligation. However, the vast majority of the targets that
require protection are those owned by the private sector-critical
infrastructure such as water and power sources and information systems. In
addition, many of the emergency response and recovery capabilities are
those with nonfederal or not-for-profit entities, such as public health
facilities. Thus homeland security can only be accomplished through
recognizing the interdependencies of federal, state, local, and private
sector partners and the careful planning and integration of the roles and
responsibilities of federal and nonfederal partners. For example,
emergency response to a terrorist attack involving chemical or biological
weapons will require effective coordination between federal, state, and
local law enforcement agencies; other first responders; as well as public
health agencies, affected hospitals, and laboratories. The challenge for
the federal government is to design, select, and manage the various tools
to encourage cost-effective integration to fully leverage scarce
resources. For example, ensuring that critical information is shared,
analyzed, integrated, and disseminated can help prevent or minimize
terrorist activities.

The following questions illustrate the kinds of issues that we will face
as the nation adapts to the changing threats to our national and homeland
security.

o 	Defense resource allocation-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
capabilities-based approach to determining defense needs?

o 	Defense support services-What kinds of 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, or health care
delivery)?

o 	Homeland security risk-What is an acceptable level of risk to guide
homeland security strategies and funding?

o 	Critical infrastructure-Are existing incentives and initiatives
sufficient to support private sector protection of critical infrastructure
they own, and what changes might be necessary? What cybersecurity
technology can be applied to protect critical infrastructure from attack?

o 	Information sharing-How can intelligence and information on threats be
shared with other levels of government and other critical entities, yet be
held secure?

Governance Challenges	The government's capacity to address these trends
and challenges is, itself, a 21st century challenge. The capacity of the
system to address the emerging issues identified in these themes is
predicated on a policymaking and management process that has sufficient
foresight, information, integration, and management capacity to fully
consider and act on emerging trends.

In part this is a question of time horizons. Policy action, or inaction,
has implications far beyond today. How can policymaking institutions
develop the capacity to consider the implications of actions or inaction
for current as well as future generations? A longer-term perspective may
be essential to keeping ahead of the "crisis curve," but it can also offer
other benefits. If the time horizon for policy debates recognized
longer-term forces, it would be easier for leaders to make the case for
change to the broader public since it permits changes to be phased in over
many years.

Whether it be future labor force trends or long-term health care costs,
policymakers will need far better performance and cost information as they
take on such broad-ranging issues. To continue to be a leading democracy
in the information age may very well mean producing unique public sources
of objective, independent, scientifically grounded, and widely shared
quality information so that we know where the United States stands now and
what the trends are on both absolute and relative bases- including
comparisons with other nations. By ensuring that the best facts are made
more accessible and usable by the many different members of our society,
we increase the probability of well-framed questions and debates along
with effective solutions. The stakes are high, including considerations
regarding allocating scarce public resources, strengthening the economy,
creating jobs, stimulating future industries, enhancing security,
promoting safety, protecting privacy, strengthening our competitive edge,
and sustaining the environment.

Addressing newly emergent issues and transformational change calls for a
policy process that can look at broader issues across the narrow confines
of individual programs, agencies, and tools. Many emerging issues are
cross-cutting in nature and the policy process will have to be
comprehensive enough to address these new tradeoffs. However, federal
programs remain highly fragmented, reflecting a policymaking process that
is overly stovepiped by agency and program, with insufficient focus on how
individual programs contribute to overarching, crosscutting goals and
missions. Although these individual programs address common or similar
performance goals, they result in an overly fragmented delivery network
and at times work at cross purposes. For example, federal food safety
programs are carried out by 12 agencies with differing enforcement
criteria and inspection practices. The Government Performance and Results
Act (GPRA) provided for a governmentwide performance plan to address these
crosscutting issues, but this plan has not yet been developed by the
executive branch.

Many emerging problems span boundaries to involve federal, state, and
local governments as well as private for profit and nonprofit entities.
Whether it be homeland security or health care delivery, federal agencies
and programs are increasingly reliant on coalitions of third-party
providers, such as states, to address challenges. Moreover, such
coalitions increasingly span national boundaries as many problems and
issues are framed by international treaties and multilateral
organizations. Often, a national, rather than strictly federal, solution
is necessary requiring partnerships and concerted effort across sectors.
Notwithstanding this increasing interdependence, major tensions exist as
each actor in the network makes decisions with insufficient dialogue with
program partners.

The foregoing suggests that public management systems and networks will
have to undergo fundamental changes to respond effectively to the daunting
challenges facing us. This calls for nothing less than a transformation in
the people, processes, and technology used to address public goals and
objectives. While some agencies are making major strides to transform
their operations, in many cases the government is still trying to do
business in ways that are based on conditions, priorities, and approaches
that existed decades ago and are not well suited to addressing 21st
century challenges.

For example, in many cases the government has not transformed how it
motivates and compensates its employees to achieve maximum results within
available resources and existing authorities. Even though people are

critical to any agency's successful transformation, define its culture,
develop its knowledge, and are its most important asset, a number of
agencies still try to manage their people through an outmoded system that
(1) rewards length of service rather than individual skills, knowledge and
performance; (2) automatically provides across-the-board annual pay
increases, even to poor performers; and (3) compensates employees living
in various localities without adequately considering the local labor
market rates for these employees. To address these problems and provide
the services the public expects, the federal civil service system must be
reformed governmentwide, and this reform must be guided by a set of
consistent principles, criteria, and practices.

Another example is the outmoded physical footprint of agencies, which
reflects the failure to take advantage of opportunities provided by new
technology and transportation to modernize operations. More than 30
federal agencies control about $328 billion in real property assets
worldwide, and maintain a "brick and mortar" buildings and/or office
presence in 11 regions across the nation. But this organization and
infrastructure reflects a business model and the technological and
transportation environment of the 1950s. Many of these assets and
organizational structures are no longer needed; others are not effectively
aligned with, or responsive to, agencies' changing missions; and many
others are in an alarming state of deterioration, potentially costing
taxpayers tens of billions of dollars to restore and repair. The Congress
and several agencies have recognized and begun to address this issue, but
this financial liability still looms.

The following questions illustrate the kinds of issues that we will face
in better aligning our governance system with the emerging challenges
posed by broad sweeping changes:

o 	National performance indicators-Is the federal government effectively
informed by a key national indicator system about the position and
progress of the nation as a whole-both on absolute and relative bases
compared to other nations-as a guide to helping set federal agency and
program goals and priorities?

o 	Crosscutting program integration-How can agencies partner or integrate
their activities in new ways, especially with each other? For example, how
can the myriad federal food safety programs managed across several federal
agencies be consolidated to better promote safety and the integrity of the
nation's food supply?

o 	Improving partnerships-What mechanisms might usefully bring together
leaders across governments to address joint problems, perhaps through
establishing commissions or other vehicles for promoting dialogue and
action?

o 	Federal human capital reform-How should the federal government update
its classification and compensation systems to be more flexible,
market-based and performance-oriented while at the same time incorporating
safeguards to help ensure consistency and equity and prevent abuse of
employees?

o 	Modernizing the federal footprint-In a modern society with advanced
telecommunications and electronic information capabilities, does the
government still need 11 regions? What opportunities exist to more
strategically manage the federal government's real property assets, such
as disposing of excess federal facilities to make the federal portfolio
more relevant to current missions and less costly?

o 	Transformational leadership-Should we create chief operating officer or
chief management officer positions with term appointments within selected
agencies to elevate, integrate, and institutionalize responsibility and
authority for business management and related transformation efforts?

Where Do We Go From Here?

We recognize that the process of reexamining the base of government will
not be a simple or easy process-there are no "quick fixes." Such a process
reverses the focus that occurs in incremental reviews, where
disproportionate scrutiny is given to proposals for new programs or
activities but little or no scrutiny is given 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. Given prior
experience and political tendencies, there is little real "low-hanging
fruit."

The size of the fiscal challenge and the significance of the societal and
economic changes worldwide means this kind of examination and the hard
choices necessary to restore a sustainable fiscal path and modernize
government may take a generation to address. Our history suggests that all
major spending and revenue programs and policies need to be subject to
periodic reviews; exempting major areas can undermine the credibility and
support for the entire process.

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 transition costs, the impact can be spread out
over longer time periods. After all, our country, children, and
grandchildren are counting on us to be both prudent today and effective
stewards for tomorrow. We should not be satisfied with anything less.

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, as this
Committee knows so well. 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 comprehensive 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 or executive reorganizations
to develop policy alternatives-has been proposed. We would suggest that
there is no single approach or institutional reform that can address the
myriad of questions and program areas that need to be revisited.

Fortunately, GPRA and other results-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,

the Congress has its own analytic support-your staff and that of the
congressional support agencies, including GAO. 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.

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.

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

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