Budget Process: Better Transparency, Controls, Triggers, and
Default Mechanisms Would Help to Address Our Large and Growing
Long-term Fiscal Challenge (25-MAY-06, GAO-06-761T).
The nation's long-term fiscal outlook is daunting. While the
budget process has not caused the problems we face, the absence
of meaningful budget controls and other mechanisms has served to
compound our fiscal challenge. Conversely, a process that
illuminates the looming fiscal pressures and provides appropriate
incentives can at least help decision makers focus on the right
questions. Meaningful budget controls and other mechanisms can
also help to assure that difficult but necessary choices are
made. The budget process needs to provide incentives and signals
to address commitments the government has already made and better
transparency for and controls on the long-term fiscal exposures
being considered. Improvements would include the restoration of
realistic discretionary caps; application of pay-as-you-go
(PAYGO) discipline to both mandatory spending and revenue
legislation; the use of "triggers" for some mandatory programs;
and better reporting of fiscal exposures.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-761T
ACCNO: A54719
TITLE: Budget Process: Better Transparency, Controls, Triggers,
and Default Mechanisms Would Help to Address Our Large and
Growing Long-term Fiscal Challenge
DATE: 05/25/2006
SUBJECT: Budget controllability
Budget deficit
Budgets
Deficit reduction
Fiscal policies
Future budget projections
Strategic planning
Transparency
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GAO-06-761T
* The Long-term Fiscal Challenge
* What Can Be Done?
* Better Incentives and Signals
* Increased Transparency and Disclosure of Long-term Costs
* Concluding Observations
* Contacts and Acknowledgments
* Order by Mail or Phone
Testimony
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:30 p.m. EDT
Thursday, May 25, 2006
BUDGET PROCESS
Better Transparency, Controls, Triggers, and Default Mechanisms Would Help
to Address Our Large and Growing Long-term Fiscal Challenge
Statement of David M. Walker Comptroller General of the United States
GAO-06-761T
Mr. Chairman, Senator Carper, and Members of the Subcommittee:
I appreciate the opportunity to speak with you today about a budget
process that can help Congress deal with the large and growing fiscal
challenges facing our nation. As you know, I have been vocal about our
long-term fiscal imbalance and the need to make difficult but necessary
choices soon so that we do not burden our children and grandchildren with
a crushing debt. While the budget process has not caused the problems we
face, the absence of meaningful budget controls and other mechanisms has
served to compound our fiscal challenge. Conversely, a process that
illuminates the looming fiscal pressures and provides appropriate
incentives, transparency and control mechanisms can help decision makers
to slow the bleeding and put us on a more prudent and sustainable
long-range fiscal path.
When updating the budget process, you face a two-pronged challenge:
o the need to reinstitute and strengthen controls to deal with
both near-term and longer-term deficits and
o the need to design a process that helps Congress tackle our
large and growing long-term fiscal challenges facing this nation
by, among other things, improving the transparency of the
long-term costs of current decisions.
Today I want to focus on the long-term budget challenge and what
role the budget process can play in helping to deal with it. Since
at its heart the budget debate is about the allocation of limited
resources, the budget process can and should play a key role in
helping to address our broader challenge of modernizing government
for the 21st century.
The nation's long-term fiscal outlook is daunting under any
realistic policy scenarios and assumptions. For over 14 years, GAO
has periodically prepared various long-term budget simulations
that seek to illustrate the likely fiscal consequences of our
coming demographic challenges and rising health care costs.
Indeed, the health care area is especially important because the
long-term fiscal challenge is largely a health care challenge.
While Social Security is important because of its size, health
care spending is both large and projected to grow much more
rapidly.
Our most recent simulation results illustrate the importance of
health care in the long-term fiscal outlook as well as the
imperative to take action soon. These simulations show that over
the long term we face large and growing structural deficits due
primarily to known demographic trends and rising health care
costs. These trends are compounded by the presence of near-term
deficits arising from new discretionary and mandatory spending as
well as lower federal revenues as a percentage of the economy.
Continuing on this imprudent and unsustainable fiscal path will
gradually erode, if not suddenly damage, our economy, our standard
of living, and ultimately our national security. Our current path
will also increasingly constrain our ability to address emerging
and unexpected budgetary needs and increase the burdens that will
be faced by our children, grandchildren, and future generations of
Americans.
Figures 1 and 2 present our long-term simulations under two
different sets of assumptions. For both simulations, Social
Security and Medicare spending is based on the 2006 Trustees'
intermediate projections, and we assume that benefits continue to
be paid in full after the trust funds are exhausted, although
current law does not provide for such. Medicaid spending is based
on the Congressional Budget Office's (CBO) December 2005 long-term
projections under its midrange assumptions. In figure 1, we start
with CBO's 10-year baseline, constructed according to the
statutory requirements for that baseline. Consistent with these
specific yet unrealistic 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 2016,
discretionary spending and revenue are held constant as a share of
gross domestic product (GDP) at the 2016 level. Under this
fiscally restrained scenario, spending for Social Security and
health care programs would grow to consume over three-quarters of
federal revenues by 2040.
The Long-term Fiscal Challenge
Figure 1: Composition of Spending as a Share of GDP under Baseline
Extended
Note: Importantly, this simulation does not include the "Tax Increase
Prevention and Reconciliation Act of 2005" (P.L. 109-222) enacted on May
17, 2006. Under this scenario, in addition to the expiration of tax cuts,
revenue as a share of GDP increases through 2016 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 2016, revenue as a share of GDP is held constant.
In figure 2, two assumptions are changed: (1) discretionary spending is
assumed to grow with the economy after 2006 rather than merely with
inflation, and (2) all expiring tax provisions are extended. In this less
restrained but possibly more realistic scenario, federal revenues will
cover little more than interest on the large and growing federal debt by
2040.
Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP after 2006 and All Expiring Tax Provisions Are
Extended
Note: This includes certain tax provisions that expired at the end of
2005, such as the increased AMT exemption amount.
While many alternative scenarios could be developed incorporating
different combinations of possible policy choices and economic
assumptions, these two scenarios can be viewed as possible "bookends" to a
range of possible outcomes.
Budget flexibility-the ability to respond to unforeseen events-is key to
being able to successfully deal with the nation's and the world's
uncertainties. By their very nature, mandatory spending
programs-entitlement programs like Medicare and Social Security-limit
budget flexibility.1 They are governed by eligibility rules and benefit
formulas, which means that funds are spent as required to provide benefits
to those who are eligible and wish to participate. As figure 3 shows,
mandatory spending has grown as a share of the total federal budget. For
example, mandatory spending on programs (i.e., mandatory spending
excluding interest) has grown from 27 percent in 1965-the year Medicare
was created-to 42 percent in 1985 to 53 percent last year. (Total spending
not subject to annual appropriations-mandatory spending and net
interest-has grown from 34 percent in 1965 to 61 percent last year.) Under
both the CBO baseline estimates and the President's Budget, this spending
would grow even further.
1Similarly, tax expenditures-subsidies provided through the tax system-may
limit flexibility on the revenue side; there is a trade-off between tax
rates and revenue lost through tax expenditures. In order to raise a given
amount of federal revenue, tax rates must be raised higher than they
otherwise need to be due to revenue losses from tax expenditures.
Figure 3: Federal Spending for Mandatory and Discretionary Programs
Figure 3 illustrates that while it is important to control discretionary
spending, the real challenge is mandatory spending. Accordingly,
substantive reform of the major health programs and Social Security is
critical to recapturing our future fiscal flexibility.
The aging population and rising health care costs will have significant
implications not only for the budget but also our economy and competitive
posture. Figure 4 shows the total future draw on the economy represented
by Social Security, Medicare, and Medicaid. Under the 2006 Trustees'
intermediate estimates and CBO's 2005 midrange and long-term Medicaid
estimates, spending for these entitlement programs combined will grow to
over 15 percent of GDP in 2030 from today's 8.9 percent. It is clear that
taken together, Social Security, Medicare, and Medicaid represent an
unsustainable burden on the federal budget and future generations.
Ultimately, the nation will have to decide what level of federal benefits
and spending it wants and how it will pay for these benefits.
Figure 4: Social Security, Medicare, and Medicaid Spending as a Percentage
of GDP
Note: Social Security and Medicare projections are based on the
intermediate assumptions of the 2006 Trustees' reports. Medicaid
projections are based on CBO's January 2006 short-term Medicaid estimates
and CBO's December 2005 long-term Medicaid projections under midrange
assumptions.
While Social Security, Medicare, and Medicaid are the major drivers of the
long-term spending outlook in the aggregate, they are not the only
promises the federal government has made for the future.2 The federal
government undertakes a wide range of responsibilities, programs, and
activities that may either obligate the government to future spending or
create an expectation for such spending. Specific fiscal exposures vary
widely as to source, likelihood of occurrence, magnitude, and strength of
the government's legal obligations. If we think of fiscal exposures as
extending from explicit liabilities (like military and civilian pensions)
to specific contingencies (like pension, flood, and other federal
insurance programs) to the commitments implicit in current policy and/or
public expectations (like the gap between the present value of future
promised and funded Social Security and Medicare benefits), the federal
government's fiscal exposures totaled more than $46 trillion at the end of
2005, up from about $20 trillion in 2000. This translates into a burden of
about $156,000 per American, or approximately $375,000 per full-time
worker-more than double what it was in 2000. These amounts are growing
every second of every minute of every day due to continuing deficits,
known demographic trends and compounding interest costs.
What Can Be Done?
Many are beginning to realize that difficult choices must be made, and
soon. A crucial first step in acting to improve our long-term fiscal
outlook will be to face facts and identify the many significant
commitments already facing the federal government. If citizens and
government officials come to better understand our nation's various fiscal
exposures and their implications for the future, they are more likely to
insist on prudent policy choices today and sensible levels of fiscal risk
in the future.
How do we get started? Today you are focusing on budget process
improvements. That's a good start. While the process itself cannot solve
the problem, it is important. It can help policymakers make tough but
necessary choices today rather than defer them until tomorrow. Restoration
of meaningful budget controls-budgetary caps and a pay-as-you-go (PAYGO)
rule on both the tax and spending side of the ledger-is a start toward
requiring that necessary trade-offs be made rather than delayed. Although
the restoration of caps and a PAYGO rule are important, they are not
enough. Among the characteristics a budget process needs for that to
happen are
2While interest is a large and growing share of the budget, it does not
directly drive the fiscal outlook in that interest is the result of other
decisions affecting spending and tax policy.
o increased transparency and better incentives, signals, triggers
and default mechanisms to address the fiscal exposures/commitments
the federal government has already made and
o better transparency for and controls over the long-term fiscal
exposures/commitments that the federal government is considering.
Let me elaborate.
There is broad consensus among observers and analysts who focus on
the budget that the controls contained in the expired Budget
Enforcement Act constrained spending for much of the 1990s. In
fact, annual discretionary budget authority actually declined in
real terms during the mid-1990s. I endorse the restoration of
realistic discretionary caps and PAYGO discipline applied to both
mandatory spending and revenue legislation. But the caps can only
work if they are realistic; while caps may be seen as tighter than
some would like, they are not likely to bind if they are seen as
totally unreasonable given current conditions. While PAYGO
discipline constrained the creation or legislative expansion of
mandatory spending and tax cuts, it accepted the existing
provisions of law as given. Looking ahead, the budget process will
need to go beyond limiting expansions. Cost increases in existing
mandatory programs cannot be ignored and the base of existing
spending and tax programs must be reviewed and re-engineered to
address our long-range fiscal gap.
Specifically, as I have said before, I would like to see a process
that forces examination of "the base" of the federal
government-for major entitlements, for other mandatory spending,
and for so-called "discretionary" spending (those activities
funded through the appropriations process).
Reexamining "the base" is something that should be done
periodically regardless of fiscal condition-all of us have a
stewardship obligation over taxpayer funds. As I have said before,
we have programs still in existence today that were designed 20 or
more years ago-and the world has changed. I would suggest that as
constraints on discretionary spending continue to tighten, the
need to reexamine existing programs and activities becomes
greater. One of the questions this Congress is grappling
with-earmarks-can be seen in this context. Whatever the
agreed-upon level for discretionary spending, the allocation
within that total will be important. How should that allocation be
determined? What sort of rules will you want to impose on both the
allocation across major areas (defense, education, etc.) and
within those areas? By definition, earmarks specify how some funds
will be used. How will the process manage them? After all, not all
earmarks are bad but many are highly questionable. It is not
surprising that in times of tight resources, the tension between
earmarks and flexibility will likely rise.
Although mandatory spending is not amenable to caps, such spending
need not-and should not-be permitted to be on autopilot and grow
to an unlimited extent. Since the spending for any given
entitlement or other mandatory program is a function of the
interaction between eligibility rules and the benefit
formula-either or both of which may incorporate exogenous factors
such as economic downturns-the way to change the path of spending
for any of these programs is to change their rules or formulas. We
recently issued a report on "triggers"-some measure that when
reached or exceeded, would prompt a response connected to that
program.3 By identifying significant increases in the spending
path of a mandatory program relatively early and acting to
constrain it, Congress may avert much larger and potentially
disruptive financial challenges and program changes in the future.
A trigger is a measure and a signal mechanism-like an alarm clock.
It could trigger a "soft" response-one that calls attention to the
growth rate of the level of spending and prompts special
consideration when the threshold or target is breached. The
Medicare program already contains a "soft" response trigger: the
President is required to submit a proposal for action to Congress
if the Medicare Trustees determine in 2 consecutive years that the
general revenue share of Medicare spending is projected to exceed
45 percent during a 7-fiscal-year period.4 The most recent
Trustees' report to Congress for the first time found that the
general revenue share of financing is projected to exceed that
threshold in 2012.5 Thus, if next year's report again concludes
that it will exceed the threshold during the 7-fiscal-year period,
the trigger will have been tripped and the President will be
required to submit his proposal for action.
Soft responses can help in alerting decision makers of potential
problems, but they do not ensure that action to decrease spending
or increase revenue is taken. In contrast, a trigger could lead to
"hard" responses under which a predetermined, program-specific
action would take place, such as changes in eligibility criteria
and benefit formulas, automatic revenue increases, or automatic
spending cuts. With hard responses, spending is automatically
constrained, revenue is automatically increased, or both, unless
Congress takes action to override-the default is the constraining
action. For example, this year the President's Budget proposes to
change the Medicare trigger from solely "soft" to providing a
"hard" (automatic) response if Congress fails to enact the
President's proposal.6
Any discussion to create triggered responses and their design must
recognize that unlike controls on discretionary spending, there is
some tension between the idea of triggers and the nature of
entitlement and other mandatory spending programs. These
programs-as with tax provisions such as tax expenditures-were
designed to provide benefits based on eligibility formulas or
actions as opposed to an annual decision regarding spending. This
tension makes it more challenging to constrain costs and to design
both triggers and appropriate responses. At the same time, with
less than 40 percent of the budget under the control of the annual
appropriations process, considering ways to increase transparency,
oversight, and control of mandatory programs must be part of
addressing the nation's long-term fiscal challenges.
Besides triggers, transparency of existing commitments would be
improved by requiring the Office of Management and Budget (OMB) to
report annually on fiscal exposures-the more than $46 trillion
figure7 I mentioned earlier-including a concise list, description,
and cost estimates, where possible. OMB should also ensure that
agencies focus on improving cost estimates for fiscal exposures.
This should complement and support continued and improved
reporting of long-range projections and analysis of the budget as
a whole to assess fiscal sustainability and flexibility.
Others have embraced this idea for better reporting of fiscal
exposures. Senator Voinovich has proposed that the President
report each January on the fiscal exposures of the federal
government and their implications for the long-term financial
health and Senator Lieberman introduced legislation to require
better information on liabilities and commitments. This year
Representatives Cooper, Chocola, and Kirk have sponsored
legislation also aimed at improving the attention paid to our
growing federal commitments. And, in his last few budgets the
President has proposed that reports be required for any proposals
that would worsen the unfunded obligations of major entitlement
programs. These proposals provide a good starting point for
discussion. Reporting is a critical first step-but, as I noted
above, it must cover not only new proposals but also existing
commitments, and it should be accompanied by some incentives and
controls. We need both better information on existing commitments
and promises and information on the long-term costs of any new
significant proposed spending increases or tax cut. Ten-year
budget projections have been available to decision makers for many
years. We must build on that regime but also incorporate
longer-term estimates of net present value (NPV) costs for major
spending and tax commitments comprising longer-term exposures for
the federal budget beyond the 10-year window. Current budget
reporting does not always fully capture or require explicit
consideration of some fiscal exposures. For example, when Medicare
Part D was being debated, much of the debate focused on the
10-year cost estimate-not on the long-term commitment that was
obviously much greater. While the budget was not designed to and
does not provide complete information on long-term cost
implications stemming from some of the government's commitments
when they are made, progress can and should be made on this front.
For example, we should require NPV estimates for major
proposals-whether on the tax side or the spending side-whose costs
escalate outside the 10-year window. And these estimates should be
disclosed and debated before the proposal is voted on.
Regarding tax provisions, it is important to recognize that tax
policies and programs financing the federal budget can be reviewed
not only with an eye toward the overall level of revenue provided
to fund federal operations and commitments, but also the mix of
taxes and the extent to which the tax code is used to promote
overall economic growth and broad-based societal objectives. In
practice, some tax expenditures are very similar to mandatory
spending programs even though they are not subject to the
appropriations process or selected budget control mechanisms. Tax
expenditures represent a significant commitment and are not
typically subject to review or reexamination. This should not be
allowed to continue nor should they continue to be largely in the
dark and on autopilot.
Finally, the growing use of emergency supplemental appropriations
raises concerns that an increasing portion of federal spending is
exempt from the discipline and trade-offs of the regular budget
process.8 Some have expressed concern that these "emergency"
supplementals are not always used just to meet the needs of
unforeseen emergencies but also include funding for activities
that could be covered in regular appropriation acts. According to
a recent Congressional Research Service report, after the
expiration of discretionary limits and PAYGO requirements at the
end of fiscal year 2002, supplemental appropriations net of
rescissions increased the budget deficit by almost 25 percent per
year.9 On average, the use of supplemental appropriations for all
purposes has grown almost 60 percent each year, increasing from
about $17 billion in fiscal year 2000 to about $160 billion in
fiscal year 2005. Constraining emergency appropriations to those
which are necessary (not merely useful or beneficial), sudden,
urgent, unforeseen, and not permanent has been proposed in the
past. The issue of what constitutes an emergency needs to be
resolved and discipline exerted so that all appropriations for
activities that are not true emergencies are considered during
regular budget deliberations.
We cannot grow our way out of our long-term fiscal challenge. We
have to make tough choices and the sooner the better. A
multi-pronged approach is necessary: (1) revise existing budget
processes and financial reporting requirements, (2) restructure
existing entitlement programs, (3) reexamine the base of
discretionary and other spending, and (4) review and revise tax
policy and enforcement programs. Everything must be on the table.
Fundamentally, we need to undertake a top-to-bottom review of
government activities to ensure their relevance and fit for the
21st century and their relative priority. Our report entitled 21st
Century Challenges: Reexamining the Base of the Federal
Government10 presents illustrative questions for policymakers 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. We hope that this report, among other things, will
be used by various congressional committees as they consider which
areas of government need particular attention and reconsideration.
The understanding and support of the American people will be
critical in providing a foundation for action. The fiscal risks I
have discussed, however, are a long-term problem whose full impact
will not likely be felt for some time. At the same time, they are
very real and time is currently working against us. The difficult
but necessary choices we face will be facilitated if the public
has the facts and comes to support serious and sustained action to
address the nation's fiscal challenges. That is why if an
Entitlement and Tax Reform Commission is created to develop
proposals to tackle our long-term fiscal imbalance, its charter
may have to include educating the public as to the nature of the
problem and the realistic solutions. While public education may be
part of a Commission's charge, we cannot wait for it to begin. As
you may know, the Concord Coalition is leading a public education
effort on this issue and I have been a regular participant.
Although along with Concord the core group is the Heritage
Foundation, the Brookings Institution, and the Committee for
Economic Development, others are also actively supporting and
participating in the effort-the state treasurers, auditors and
comptrollers, the American Institute of Certified Public
Accountants, AARP, and the National Academy of Public
Administration. I am pleased to take part in this national
education and outreach effort to help the public understand the
nature and magnitude of the long-term financial challenge facing
this nation. This is important because while process reform can
structure choices and help, broad understanding of the problem is
also essential. After all, from a practical standpoint, the public
needs to understand the nature and extent of our fiscal challenge
before their elected representatives are likely to act.
Thank you, Mr. Chairman. This concludes my prepared remarks. I
would be happy to answer any questions you may have.
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Assistant Director; Carlos Diz, Assistant General Counsel; and
Melissa Wolf, Senior Analyst.
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Better Incentives and Signals
3GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth,
GAO-06-276 (Washington, D.C.: Jan. 31, 2006).
4For the purpose of the Medicare trigger, general revenue Medicare funding
is defined as the difference between Medicare program outlays and
dedicated Medicare financing sources. Dedicated Medicare financing sources
are defined as Hospital Insurance (HI) payroll taxes; the HI share of
income taxes on Social Security benefits; state transfers for Part D
prescription drug benefits; premiums paid under Parts A, B, and D; and any
gifts received by the trust funds.
5The Boards of Trustees, Federal Hospital Insurance and Federal
Supplementary Insurance Trust Funds, The 2006 Annual Report of the Boards
of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds (Washington, D.C.: May 2006), 27.
6The response would include a sequester if Congress did not act on the
President's proposal. The proposed sequester would result in a four-tenths
of a percent reduction in all payments to providers beginning in the year
the threshold is exceeded. Each year the shortfall continues to occur the
reduction would grow by an additional four-tenths of a percent. We have
not yet analyzed how this would work.
Increased Transparency and Disclosure of Long-term Costs
7This figure is as of the end of 2005-it will be higher at the end of this
year.
8While most budget enforcement mechanisms expired in fiscal year 2002,
Congress generally includes overall limits on discretionary spending and
PAYGO points of order in its budget resolution to manage its internal
budget process.
9Congressional Research Service, Supplemental Appropriations: Trends and
Budgetary Impacts Since 1981 (Washington, D.C.: Nov. 2, 2005).
Concluding Observations
10GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
Contacts and Acknowledgments
(450497)
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Highlights of GAO-06-761T , a testimony before the Subcommittee on Federal
Financial Management, Government Information, and International Security,
Committee on Homeland Security and Governmental Affairs, U.S. Senate
May 25, 2006
BUDGET PROCESS
Better Transparency, Controls, Triggers, and Default Mechanisms Would Help
to Address Our Large and Growing Long-term Fiscal Challenge
The nation's long-term fiscal outlook is daunting. While the budget
process has not caused the problems we face, the absence of meaningful
budget controls and other mechanisms has served to compound our fiscal
challenge. Conversely, a process that illuminates the looming fiscal
pressures and provides appropriate incentives can at least help decision
makers focus on the right questions. Meaningful budget controls and other
mechanisms can also help to assure that difficult but necessary choices
are made.
The budget process needs to provide incentives and signals to address
commitments the government has already made and better transparency for
and controls on the long-term fiscal exposures being considered.
Improvements would include the restoration of realistic discretionary
caps; application of pay-as-you-go (PAYGO) discipline to both mandatory
spending and revenue legislation; the use of "triggers" for some mandatory
programs; and better reporting of fiscal exposures.
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 imprudent and unsustainable fiscal path will gradually
erode, if not suddenly damage, our economy, our standard of living, and
ultimately our national security. Our current path will also increasingly
constrain our ability to address emerging and unexpected budgetary needs
and increase the burdens that will be faced by our children,
grandchildren, and future generations.
The budget process itself cannot solve this problem, but it can help
policymakers make tough but necessary choices. If citizens and government
officials come to better understand various fiscal exposures and their
implications for the future, they are more likely to insist on prudent
policy choices today and sensible levels of fiscal risk in the future.
Composition of Spending as a Share of GDP Assuming Discretionary Spending
Grows with GDP after 2006 and All Expiring Tax Provisions Are Extended
Note: This includes certain tax provisions that expired at the end of
2005, such as the increased alternative minimum tax exemption amount.
We cannot grow our way out of our long-term fiscal challenge. We must make
tough choices and the sooner the better. A multi-pronged approach is
needed: (1) revise existing budget processes and financial reporting
requirements, (2) restructure existing entitlement programs, (3) reexamine
the base of discretionary and other spending, and (4) review and revise
tax policy and enforcement programs-including tax expenditures. Everything
must be on the table and a credible and effective Entitlement and Tax
Reform Commission may be necessary. Fundamentally we need a top-to-bottom
review of government activities to ensure their relevance and fit for the
21st century and their relative priority.
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