Long-Term Fiscal Challenge: Additional Transparency and Controls 
Are Needed (25-JUL-07, GAO-07-1144T).				 
                                                                 
This testimony relates to the broader question: How should we	 
deal with our nation's long-term fiscal challenge in order to	 
help ensure that our future is better than our past? This	 
testimony will start with our longer-term fiscal challenge. Then 
it will turn to the process question you present at this hearing:
the reimposition of a statutory PAYGO rule(s) as a step toward	 
dealing with this challenge. Finally it will talk about moving	 
beyond caps and PAYGO to some ideas on how improved transparency 
and process changes can help in the effort to put us on a more	 
prudent and sustainable long-term fiscal path. As widely reported
earlier this month, the Administration now expects the deficit	 
for fiscal year 2007 to be $205 billion, down from its February  
estimate of $244 billion and last year's deficit of $248 billion.
However, because these numbers include the Social Security	 
surpluses, they mask what GAO likes to call the "operating	 
deficit" now estimated to be $385 billion for fiscal year 2007.  
Clearly lower short-term deficits are better than higher	 
short-term deficits. However, our real challenge is not 	 
short-term deficits, rather it's the long-term structural	 
deficits and related debt burdens that could swamp our ship of	 
state if we do not get serious soon. Specifically, while our	 
near-term fiscal picture is better, our long-term fiscal outlook 
is not. Health care costs are still growing faster than the	 
economy and the population is still aging. Indeed, what we call  
the long-term fiscal challenge is not in the distant future. The 
first of the baby boomers become eligible for early retirement	 
under Social Security on January 1, 2008--less than 1 year from  
now-- and for Medicare benefits in 2011--just 3 years later. The 
budget and economic implications of the baby boom generation's	 
retirement have already become a factor in Congressional Budget  
Office's (CBO) 10-year baseline projections and will only	 
intensify as the baby boomers age. Simply put, our nation is on  
an imprudent and unsustainable long-term fiscal path that is	 
getting worse with the passage of time. Herbert Stein once said  
that something that is not sustainable will stop. That, however, 
should not give us comfort. Clearly, it is more prudent to change
the path than to wait until a crisis occurs. While restraint in  
the near term and efforts to balance the budget over the next 5  
years can be positive, they are not enough. It is also important 
that we take steps to address our longer-term fiscal imbalance.  
The real problem is not the nearterm deficit--it is the long-term
fiscal outlook. It is important to look beyond year 5 or even	 
year 10. Both the budget and the budget process need more	 
transparency over and focus on the long-term implications of	 
current and proposed spending and tax policies. GAO will suggest 
a number of things that it believes will help in this area in	 
this testimony. These remarks are based on our previous work on a
variety of issues, including reports and testimonies on our	 
nation's long-term fiscal challenges and budget process reform.  
These efforts were conducted in accordance with generally	 
accepted government auditing standards. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1144T					        
    ACCNO:   A73275						        
  TITLE:     Long-Term Fiscal Challenge: Additional Transparency and  
Controls Are Needed						 
     DATE:   07/25/2007 
  SUBJECT:   Accountability					 
	     Budget controllability				 
	     Budget deficit					 
	     Budget obligations 				 
	     Entitlement programs				 
	     Financial analysis 				 
	     Fiscal policies					 
	     Future budget projections				 
	     Presidential budgets				 
	     Transparency					 

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GAO-07-1144T

   

     * [1]The Nation's Long-Term Fiscal Challenge
     * [2]Mandatory Spending Programs Drive the Long-term Fiscal Outlo
     * [3]Budget Controls Step 1: Stop Digging
     * [4]Moving Beyond PAYGO: Process and Presentational Changes to I
     * [5]Meeting the Long-Term Fiscal Challenge Requires Truth, Trans
     * [6]Concluding Remarks
     * [7]Scope and Methodology
     * [8]Contact and Acknowledgments
     * [9]Supplemental Reporting in the President's Annual Budget Subm
     * [10]Summary Financial Report for the General Public
     * [11]Statement of Fiscal Sustainability
     * [12]Additional Cost Information on Legislative Proposals before
     * [13]GAO Report on the Financial Condition of the U.S. Government
     * [14]GAO's Mission
     * [15]Obtaining Copies of GAO Reports and Testimony

          * [16]Order by Mail or Phone

     * [17]To Report Fraud, Waste, and Abuse in Federal Programs
     * [18]Congressional Relations
     * [19]Public Affairs

Testimony

Before the Committee on the Budget, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, July 25, 2007

LONG-TERM FISCAL CHALLENGE

Additional Transparency and Controls Are Needed

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

GAO-07-1144T

Chairman Spratt, Mr. Ryan, Members of the Committee,

I appreciate being invited to testify today as you consider the
restoration of a statutory pay-as-you go rule(s), or PAYGO. As this
Committee knows as well or better than any, this discussion is part of the
broader question: How should we deal with our nation's long-term fiscal
challenge in order to help ensure that our future is better than our past?

In my testimony today, I will start with our longer-term fiscal challenge.
Then I will turn to the process question you present at this hearing: the
reimposition of a statutory PAYGO rule(s) as a step toward dealing with
this challenge. Finally I will talk about moving beyond caps and PAYGO to
some ideas on how improved transparency and process changes can help in
the effort to put us on a more prudent and sustainable long-term fiscal
path.

As widely reported earlier this month, the Administration now expects the
deficit for fiscal year 2007 to be $205 billion, down from its February
estimate of $244 billion and last year's deficit of $248 billion. However,
because these numbers include the Social Security surpluses, they mask
what I like to call the "operating deficit" now estimated to be $385
billion for fiscal year 2007. Clearly lower short-term deficits are better
than higher short-term deficits. However, our real challenge is not
short-term deficits, rather it's the long-term structural deficits and
related debt burdens that could swamp our ship of state if we do not get
serious soon. Specifically, while our near-term fiscal picture is better,
our long-term fiscal outlook is not. Health care costs are still growing
faster than the economy and the population is still aging. Indeed, what we
call the long-term fiscal challenge is not in the distant future. The
first of the baby boomers become eligible for early retirement under
Social Security on January 1, 2008--less than 1 year from now-- and for
Medicare benefits in 2011--just 3 years later. The budget and economic
implications of the baby boom generation's retirement have already become
a factor in Congressional Budget Office's (CBO) 10-year baseline
projections and will only intensify as the baby boomers age. Simply put,
our nation is on an imprudent and unsustainable long-term fiscal path that
is getting worse with the passage of time.

Herbert Stein once said that something that is not sustainable will stop.
That, however, should not give us comfort. Clearly, it is more prudent to
change the path than to wait until a crisis occurs. While restraint in the
near term and efforts to balance the budget over the next 5 years can be
positive, they are not enough. It is also important that we take steps to
address our longer-term fiscal imbalance. The real problem is not the
near-term deficit--it is the long-term fiscal outlook. It is important to
look beyond year 5 or even year 10. Both the budget and the budget process
need more transparency over and focus on the long-term implications of
current and proposed spending and tax policies. I will suggest a number of
things that I believe will help in this area in this testimony.

My remarks are based on our previous work on a variety of issues,
including reports and testimonies on our nation's long-term fiscal
challenges and budget process reform. These efforts were conducted in
accordance with generally accepted government auditing standards.

The Nation's Long-Term Fiscal Challenge

Long-term fiscal simulations by GAO, CBO, and others all show that despite
some modest improvement in near-term deficits, we face large and growing
structural deficits driven primarily by rising health care costs and known
demographic trends. In fact, the long-term fiscal challenge is largely a
health care challenge. Although Social Security is important because of
its size, the real driver is health care spending. It is both large and
projected to grow more rapidly in the future.

GAO's current long-term simulations show ever-larger deficits resulting in
a federal debt burden that ultimately spirals out of control. Figure 1
shows two alternative fiscal paths. The first is "Baseline extended,"
which extends the CBO's baseline estimates beyond the 10-year projection
period, and the second is an alternative based on recent trends and policy
preferences. Our alternative scenario assumes action to return to and
remain at historical levels of revenue and reflects somewhat higher
discretionary spending and more realistic Medicare estimates for physician
payments than does the baseline extended scenario.1 Although the timing of
deficits and the resulting debt build up varies depending on the
assumptions used, both simulations show that we are on an unsustainable
fiscal path.

1Additional information about the GAO model and its assumptions, data, and
charts can be found at http://www.gao.gov/special.pubs/longterm/.

Figure 1: Unified Surpluses and Deficits as a Share of GDP under
Alternative Fiscal Policy Simulations

The bottom line is that the nation's longer-term fiscal outlook is
daunting under any realistic policy scenario or assumptions. Continuing on
this unsustainable fiscal path will gradually erode, if not suddenly
damage, our economy, our standard of living, and ultimately our national
security. Our current path also increasingly will constrain our ability to
address emerging and unexpected budgetary needs and increase the burdens
that will be faced by future generations.

As I noted earlier, despite some recent improvements in short-term
deficits, the long-term outlook is moving in the wrong direction. Figures
2 and 3 illustrate just how much worse the situation has become. Both
figures show the potential fiscal outcome under our "Baseline extended"
scenario. Figure 2 shows the fiscal outlook in 2001 and figure 3 shows the
outlook now. The contrast is dramatic. Even with the surpluses of 2001, we
had a long-term problem, but it was more than 40 years out. Although an
economic slowdown and decisions driven by the attacks of 9/11 and the need
to respond to natural disasters have contributed to the change in outlook,
they do not account for the dramatic worsening in the long-term outlook
since 2001. Subsequent tax cuts and the passage of the Medicare
prescription drug benefit in 2003 were major factors.

Figure 2: Potential Fiscal Outcomes under Baseline Extended, January 2001:
Revenue and Composition of Spending as a Share of GDP

aAll other spending is net of offsetting interest receipts.

Figure 3: Potential Fiscal Outcomes under Baseline Extended, April 2007:
Revenue and Composition of Spending as a Share of GDP

Notes: In addition to the expiration of tax cuts, revenue as a share of
GDP increases through 2017 mainly due to (1) real bracket creep, (2) more
taxpayers becoming subject to the AMT, and (3) increased revenue from
tax-deferred retirement accounts. After 2017, revenue as a share of GDP is
held constant--implicitly assuming that action is taken to offset
increased revenue from real bracket creep, the AMT, and tax-deferred
retirement accounts.

Figure 3 illustrates today's cold hard truth: that neither slowing the
growth in discretionary spending nor allowing the tax provisions to
expire--nor both together--would eliminate the longer-term imbalance. This
is even clearer under our alternative scenario based on recent trends and
policy preferences (see fig. 4). Growth in the major entitlement
programs--primarily health spending--results in an unsustainable fiscal
future regardless of whether one assumes future revenue will be somewhat
above historical levels as a share of the economy as in the first
simulation (fig. 3) or at historical levels as shown in figure 4.

Figure 4: Potential Fiscal Outcomes under Alternative Simulation, April
2007: Revenues and Composition of Spending as a Share of GDP

Notes: AMT exemption amount is retained at the 2006 level through 2017 and
expiring tax provisions are extended. After 2017, revenue as a share of
GDP returns to its historical level of18.3 percent of GDP plus expected
revenues from deferred taxes, i.e. taxes on withdrawals from retirement
accounts. Medicare spending is based on the Trustees April 2007
projections adjusted for the Centers for Medicare and Medicaid Services
alternative assumption that physician payments are not reduced as
specified under current law.

Rapidly rising health care costs are not simply a federal budget problem;
they are our nation's number one fiscal challenge. Just last week, GAO
released the results of our latest fiscal modeling efforts showing that
state and local governments--absent policy changes--will also face large
and growing fiscal challenges beginning within the next few years.2 As is
true for the federal budget, growth in health-related spending--Medicaid
and health insurance for state and local employees and retirees--is the
primary driver of the fiscal challenges facing the state and local
governments. In short, the fundamental fiscal challenges of all levels of
government are similar and linked. Further, escalating health care costs
are also a major competitiveness challenge for American businesses and a
growing challenge for many Americans. As such, solutions to address these
challenges should be considered in a strategic and integrated manner.

2See GAO, State and Local Governments: Persistent Fiscal Challenges Will
Likely Emerge within the Next Decade [20]GAO-07-1080SP (Washington, D.C.:
July 18, 2007).

The longer-term fiscal challenge we face is not solely a federal one--it
is a national one. Figure 5 shows both the federal fiscal path and the
fiscal path for the whole of government.

Figure 5: Federal and Combined Federal, State, and Local Surpluses and
Deficits as a Share of GDP

Note: Historical data from 2000-2006, projections from 2007-2050; state
and local balance measure is similar to the federal unified budget
measure.

Mandatory Spending Programs Drive the Long-term Fiscal Outlook

There often seems to be an imbalance between the focus of press coverage
and public debate and what drives the longer-term outlook. Reporting and
debate are often focused on what the Budget Enforcement Act (BEA) called
discretionary--the one-third of the budget that goes through the annual
appropriation process:3 Is funding for specific programs being cut or
increased? Is "too much" or "too little" being spent in a given area? I
would be the last person to say this isn't important. Much of what the
American people think of as government is contained in that part of the
budget. Further, as I have said before, I believe that reexamining "the
base" is something that should be done periodically regardless of fiscal
condition--all of us have a stewardship obligation over taxpayer funds. We
have programs still in existence today that were designed 20 or more years
ago--and the world has changed. However, I would suggest that as
constraints on discretionary spending continue to tighten, the need to
reexamine existing programs and activities becomes greater.

Certainly controlling discretionary spending is important, but--as
everyone in this room knows even with the large costs associated with the
"Global War on Terrorism" and Iraq--discretionary spending is not the part
of the budget that drives the long-term fiscal imbalance. As figure 6
shows, mandatory programmatic spending--that is mandatory spending
excluding interest--has grown from 27 percent of the federal budget in
1965--the year Medicare was created--to 42 percent in 1985 to 53 percent
last year. Total mandatory spending including net interest--has grown from
34 percent in 1965 to 62 percent last year. Both the CBO baseline
estimates and the President's Budget proposal show this spending growing
even further.

3See 2 U.S.C. S 900(c)(7).

Figure 6: Federal Spending for Mandatory and Discretionary Programs

This growth--in particular rising health care spending--will have
significant implications not only for the budget, but also for the economy
as a whole. Figure 7 shows the total future draw on the economy
represented by Social Security, Medicare, and Medicaid. Under the 2007
Trustees' intermediate estimates and CBO's 2005 midrange Medicaid
estimates, spending for these entitlement programs combined will grow to
over 15 percent of GDP in 2030 from today's 8.9 percent. Taken together,
it is clear that Social Security, Medicare, and Medicaid represent an
unsustainable burden on the federal budget, our economy, and future
generations. Ultimately, the nation will have to decide what level of
benefits and spending it wants and how it will pay for these benefits.

Figure 7: Social Security, Medicare, and Medicaid Spending as a Percentage
of GDP

Note: Social Security and Medicare projections based on the intermediate
assumptions of the 2007 Trustees' Reports. Medicaid projections based on
CBO's January 2007 short-term Medicaid estimates and CBO's December 2005
long-term Medicaid projections under mid-range assumptions.

Although these three programs dominate the long-term outlook, they are not
the only federal programs or activities that bind the future. 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. Part of what we owe the future is
leaving enough flexibility to meet whatever challenges arise. So beyond
dealing with the "big 3," we need to look at other policies that limit
that flexibility--not to eliminate all of them but to at least be aware of
them and make a conscious decision to reform them in a manner that will be
responsible, equitable, and sustainable. GAO has described the range and
measurement of such fiscal exposures--from explicit liabilities such as
environmental cleanup requirements to the more implicit obligations
presented by life-cycle costs of capital acquisition or disaster
assistance.

Last year the U.S. government's major reported liabilities, social
insurance commitments, and other fiscal exposures continued to grow. They
now total approximately $50 trillion--about four times the nation's total
output (GDP) in fiscal year 2006--up from about $20 trillion, or two times
GDP in fiscal year 2000. Absent meaningful reforms, these amounts will
continue to grow every second of every minute of every day due to
continuing deficits, known demographic trends and compounding interest
costs. While it is hard to make sense of what "trillions" means, one way
to think of these numbers is that if we wanted to put aside today enough
to cover these promises, it would take $170,000 for each and every
American, including newborns, or approximately $440,000 per American
household. Considering that median household income is about $46,000, the
household burden is about 9.5 times median income.

Just two weeks ago the Office of Management and Budget released its
mid-session budget update--showing further improvement in this year's
budget deficit. This "good news," however, did not signal any improvement
in the long-term outlook. The problem isn't this year's deficit--or even
the deficit in 2012. The problem is that we are on an imprudent and
unsustainable path.

Budget Controls Step 1: Stop Digging

When I appeared before this Committee in January4 I noted that I have
previously urged a restitution of the statutory budget controls--including
meaningful caps on discretionary spending and PAYGO on both the tax and
spending sides of the ledger. Given the focus of this hearing, let me
elaborate.

BEA--of which PAYGO was a part--had a number of strengths its predecessor,
Gramm-Rudman-Hollings, lacked.5 Consistent with good practice in designing
incentives, it focused on what Congress and the administration could
control--spending and tax decisions--rather than on outcomes driven by
external changes. In addition, enforcement was targeted--further
encouraging compliance with the discretionary caps and PAYGO rules. There
is broad consensus among observers and analysts who focus on the budget
that the controls contained in the Budget Enforcement Act constrained
spending for much of the 1990s. However, since the BEA was focused on
deficit reduction, its effectiveness deteriorated with the achievement of
near-term surpluses. Although the BEA statutory PAYGO rules were extended
twice, they expired in 2002.

4GAO, Long-Term Budget Outlook: Deficits Matter-Saving Our Future Requires
Tough Choices Today, [21]GAO-07-389T (Washington, D.C.: Jan. 23, 2007)
(Testimony before the House Committee on the Budget).

5Budget Enforcement Act of 1990, Pub. L. No. 101-508, title XIII, 104
Stat. 1388, 1388-573 (Nov. 5, 1990); Balanced Budget and Emergency Deficit
Control Act of 1985, Pub. L. No. 99-177, title II, 99 Stat. 1037, 1038
(Dec. 12, 1985).

Earlier this year, both the Senate and the House adopted rules reinstating
PAYGO discipline on both sides of the ledger. Then why should we consider
restoration of statutory PAYGO? The obvious answer ties to enforcement and
duration: it may be easier to waive a rule than ignore a law, and a law
can carry a penalty designed to encourage compliance. I will defer to
Director Orszag and some of the technical experts on the next panel as to
the details of how any sequester or enforcement mechanism should be
designed. However, I will note that it should be unpleasant enough to
encourage compliance but not so draconian as to be implausible. The goal
of any penalty should be to encourage compliance, not to encourage
avoidance or merely impose the penalty.

As I have said before, when you are in a hole, the first thing to do is
stop digging. Discretionary caps and PAYGO are designed to stop the
digging. There are two reasons to impose PAYGO on both the direct spending
and the revenue side of the budget. The first is obvious--both affect the
bottom line. The second--and perhaps as important--is that applying PAYGO
only to spending is likely to lead to more programs being designed as tax
preferences. Tax preferences are like a form of back door spending. As a
result, they need to be subject to additional transparency and controls as
well. We have previously reported6 on these tax expenditures, which are
often aimed at policy goals similar to those of federal spending programs.
Revenues forgone through tax expenditures--unless offset by increased
taxes or lower spending--increase the unified budget deficit and federal
borrowing from the public (or reduce the unified budget surplus available
to reduce debt held by the public). Unlike discretionary spending
programs, which are subject to periodic reauthorization and annual
appropriation, tax expenditures are--like entitlement programs--permanent
law and generally not subject to a recurring legislative process that
would ensure systematic annual or periodic review. BEA's statutory PAYGO
regime applied to both mandatory spending and revenues--and so limited the
ability to create or expand either spending entitlements or tax
expenditures unless offsetting funds could be raised. Since tax provisions
are not as visible in the budget as spending programs, there is already
some incentive to use tax provisions rather than spending programs to
accomplish programmatic ends; imposing controls on spending programs but
not on tax provisions would only increase this incentive. It would be an
unfortunate consequence if the restoration of the PAYGO rule were to lead
to an increase in the portion of the budget on automatic pilot and
therefore reduce both transparency and control.

6GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined,
[22]GAO-05-690 (Washington D.C.: Sept. 23, 2005).

Moving Beyond PAYGO: Process and Presentational Changes to Increase Transparency
and Focus on Long-Term Consequences

The PAYGO requirement prevented legislation that lowered revenue, created
new mandatory programs, or otherwise increased direct spending from
increasing the deficit unless offset by other legislative actions. While
PAYGO constrained the creation or legislative expansion of direct spending
programs and tax cuts, it accepted the existing provisions of law as
given. It was not designed to trigger--and it did not trigger--any
examination of "the base." Furthermore, cost increases in existing
mandatory programs were exempt from control under PAYGO and could be
ignored. However, constraining legislative actions that increase the cost
of entitlements, mandatories, and tax expenditures is not enough. Looking
ahead, the budget process will need to go beyond limiting expansions.
Existing programs cannot 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. In January of last year, we issued a report on "triggers"--some
measure that when reached or exceeded, would prompt a response connected
to that program.7 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 similar approach could be
applied to those tax expenditures that operate in many ways like mandatory
spending programs. Some years ago, Mr. Chairman, you had suggested a kind
of "look back" trigger--a requirement that the President and the Congress
monitor the path of existing entitlements and make an explicit
determination about whether to accept growing costs or to take action to
change the path.

7GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth,
[23]GAO-06-276 (Washington, D.C.: Jan. 31, 2006).

I know it comes as no surprise to anyone in this room that I believe we
need to increase the understanding of and focus on the longer term in our
policy and budget debates. When I was here in January I spoke about some
ideas I had been discussing with a number of Members of the House and
Senate as well as other interested and concerned citizens and groups.
Since then--at the request of some Members--I have had those ideas put
into legislative language as a basis for discussion. Today I'd like to
elaborate a little on some of those ideas. They fall into three broad
categories: increased information and reporting by the executive
branch--both in the President's budget proposal and in other statements
for the public; more information for the Congress, and an annual GAO
report. I will discuss each in turn. A summary of the proposal appears in
appendix I.

I. Executive Branch Reporting & Information

A. Increased Information in the President's Budget Proposals

           o Annual Report on Fiscal Exposures: The transparency of existing
           commitments would be improved by requiring OMB to report annually
           on existing fiscal exposures--including a concise list,
           description and cost information.8 As I noted before, these
           exposures range from explicit liabilities to implicit promises
           embedded in the structure of current programs. This should be
           provided as supplementary information in the President's budget
           along with information on the long-term costs of major tax
           expenditures. As appropriate and possible, showing tax
           expenditures, related spending programs and related credit
           programs that address the same policy area would facilitate
           oversight and reexamination by the Congress.
           o Information over a longer time horizon: (1) The President's
           budget should include an estimate of the impact of any major
           spending or tax proposals on these fiscal exposures and on the
           long-term fiscal outlook; (2) The budget should provide
           year-by-year data for 10 fiscal years rather than the current 5;
           and (3) The President's budget should include a statement of his
           budgetary goals for the next decade.

8For more information on fiscal exposures, see GAO, Fiscal Exposures:
Improving the Budgetary Focus on Long-Term Costs and Uncertainties,
[24]GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

B. Executive Branch Reporting and Information--Summary Annual Report and
Statement of Fiscal Sustainability

           o Summary Annual Report: One of the things I am proudest of from
           my tenure as a public trustee for Social Security and Medicare is
           the creation of a Summary Report to accompany the annual Trustees
           report. This summary report presents key information in a way more
           accessible to the press and lay reader. I believe it has
           contributed to improved understanding about the condition of these
           programs. As the Comptroller General I sign the audit report on
           the Consolidated Financial Statements of the U.S. Government
           (CFS). Despite the fact that we must disclaim our opinion on the
           statements I believe they contain important information. The
           report is, however, too thick and very hard to read. I believe the
           Department of the Treasury (Treasury) should publish a summary
           financial report derived from the information in the audited CFS
           and the Comptroller General's audit report on it within 15 days of
           the issuance of that audit report.
           o Every four years the Treasury should do more--it should prepare
           and publish a fiscal sustainability report including information
           and an assessment of the long-term fiscal sustainability of our
           current spending and revenue path. A number of other Organization
           for Economic Co-operation and Development (OECD) countries have
           begun to do fiscal sustainability reports as a way of looking
           ahead. Such a report permits the public and policymakers to look
           at the full range of government commitments rather than focusing
           only on new proposals.

II. Additional Information for the Congress

           o If Congress is to balance short-term claims and long-term costs
           it must have information about the long-term cost implications of
           proposals that would result in a significant increase or decrease
           in revenues or spending. I recognize that estimates over a
           multi-decade period cannot be as precise as short-term estimates
           and that some programs are harder to cost out than Social
           Security. However, information about the path should be made
           available. For example, do costs double every decade?

III. GAO Report

           o As the independent auditor of the federal government's
           Consolidated Financial Statements and an agency of the legislative
           branch without a day-to-day responsibility in the budget process,
           I believe GAO is in an excellent position to pull together
           periodic financial and fiscal information in a summary report
           similar to the fiscal stewardship report I issued January 31 of
           this year. If Congress does impose additional transparency
           requirements on the Executive Branch, then we are in a good
           position to look over how those requirements were implemented and
           to suggest what changes, if any, might be made.

Meeting the Long-Term Fiscal Challenge Requires Truth, Transparency, Cooperation
and Compromise--and Action Should not be Delayed Further

I think we all know that there is no easy way out of the large and growing
longer-term fiscal challenge we face. Economic growth is essential, but we
cannot grow our way out of the problem. Based on reasonable assumptions
the math does not come close to working. I have said that the first thing
to do is stop digging--and the restoration of credible discretionary caps
and PAYGO on both the spending and tax side of the ledger can help with
that. Important as they are, however, they are not enough.

Fundamental reform of existing entitlement programs will be necessary to
change the path of those programs. The fact that the long-term outlook is
driven primarily by health care costs does not mean that the rest of the
budget should be exempt from scrutiny. We have the opportunity to bring
our government and its programs in line with 21st century realities.9
Those who believe we can solve this problem solely by cutting spending or
raising taxes are not being realistic. The truth is we will also need to
reform entitlement programs, re-prioritize and re-engineer other direct
spending programs, and engage in comprehensive tax reform that generates
additional revenue as a percent of the economy (compared to current and
historical levels) in order to get the job done.

9GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [25]GAO-05-325SP (Washington, DC: February 2005) and Suggested
Areas for Oversight for the 110th Congress, [26]GAO-07-235R (Washington,
D.C.: Nov. 17, 2006)

Concluding Remarks

I have long believed that the American people can accept difficult
decisions as long as they understand why such choices are necessary. They
need to be given the facts about the fiscal outlook: what it is, what
drives it, and what it will take to address it. As most of you know, I
have been investing a good deal of time in the Fiscal Wake-Up Tour (FWUT)
led by the Concord Coalition. Scholars from both the Brookings Institution
and the Heritage Foundation join with me and key Concord officials in
laying out the facts and discussing the possible ways forward. In our
experience, having these people with quite different policy views agree on
the nature, scale and importance of the issue--and on the need to sit down
and work together to develop a multi-dimensional solution to our
longer-term fiscal challenge--resonates with the audiences.

The specific policy choices made to address this fiscal challenge are the
purview of elected officials. The policy debate will reflect differing
views of the role of government and differing priorities for our country.
What the FWUT can do--and what I will continue to do--is lay out the
facts, debunk various myths, discuss possible options and prepare the way
for tough choices by elected officials. If the American people understand
that there is no magic bullet--if they understand that

           o we cannot grow our way out this problem;

           o eliminating earmarks will not solve the problem;

           o wiping out fraud, waste and abuse will not solve the problem;

           o ending the "Global War on Terrorism", exiting from Iraq, or
           cutting way back on defense will not solve the problem; and

           o letting the recent tax cuts expire will not solve this problem;

then they can engage with you in a discussion about what government should
do; how it should do it; and how we should pay for it without unduly
mortgaging the future of our country, children, and grandchildren. This is
a great nation, probably the greatest in history. We have faced many
challenges in the past and we have met them. It is a mistake to
underestimate the commitment of the American people to their country,
children, and grandchildren; to underestimate their willingness and
ability to hear the truth and support the decisions necessary to deal with
this challenge. We owe it to our country, children and grandchildren to
address our fiscal and other key sustainability challenges. The clock is
ticking and time is working against us. The time for action is now.

Chairman Spratt, Mr. Ryan, Members of the Committee, let me repeat my
appreciation for your commitment and concern in this matter. We at GAO
stand ready to assist you in this important effort.

Scope and Methodology

My remarks are based largely on previous reports and testimonies, such as
Long-Term Budget Outlook: Deficits Matter--Saving Our Future Requires
Tough Choices Today ( [27]GAO-07-389T ) and Budget Process: Better
Transparency, Controls, Triggers, and Default Mechanisms Would Help to
Address Our Large and Growing Long-term Fiscal Challenge ( [28]GAO-06-761T
). We updated these testimonies with the results from our most recent
long-term simulations in The Nation's Long-Term Fiscal Outlook: April 2007
Update ( [29]GAO-07-983R ).

Contact and Acknowledgments

Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this testimony. For further
information on this testimony, please contact Susan J. Irving at (202)
512-9142 or [email protected]. Individuals making key contributions to this
testimony include Jay McTigue, Assistant Director; Matthew Mohning, Senior
Analyst and Melissa Wolf, Senior Analyst.

Appendix I: Transparency in Accounting and Budgeting: Legislative
Recommendations of the Comptroller General

Supplemental Reporting in the President's Annual Budget Submission

           o Produce as supporting information to the budget an annual
           Statement of Fiscal Exposures, including:

                        o a concise list, dollar estimates, and descriptions
                        of exposures, including--

                                     o information from Consolidated
                                     Financial Statements of the U.S.
                                     Government on total liabilities,
                                     contingencies, commitments, and net
                                     present value of social insurance
                                     program payments, and
                                     o long-term cost (> 40 years) of major
                                     tax expenditures, presented together
                                     with related spending or credit programs
                                     in the same policy area , if appropriate

                        o dollar estimate of the effect on these exposures of
                        all major spending or tax proposals
                        o an assessment of methodologies and data used to
                        produce such cost estimates
                        o a graphic presentation of the dollar amounts of
                        exposures presented as percentage of GDP for each
                        year covered

           o Budget horizon expanded to cover 10 fiscal years
           o President shall include in the budget a statement of the
           President's budgetary goals for a 10-year period in terms of
           surplus or deficit and in terms of surplus or deficit as a
           percentage of GDP

Summary Financial Report for the General Public

           o Pursuant to OMB form and content guidance, Treasury shall
           annually publish a summary financial report on the U.S. Government
           derived from the information in the audited annual Consolidated
           Financial Statements of the U.S. Government.

                        o Report shall be in format and of length, content
                        and sophistication for general American public
                        o Report shall include condensed summary of CG's
                        audit report on the CFS

           o First annual report due no later than January 30, 2008 [Note:
           This requires an amendment to GMRA (31 USC 331(e)(1)) to make
           audited CFS due by January 15 each year and an amendment to the
           Accountability for Tax Dollars Act (31 USC 3515(a)) to make agency
           financial statements due by November 30 each year.]

Statement of Fiscal Sustainability

           o Pursuant to OMB form and content guidance, Treasury to prepare
           and make public every four years an assessment of the long-term
           sustainability of all major federal programs and activities.
           Statement of Fiscal Sustainability shall include:

                        o PV of projected receipts and outlays of federal
                        programs and activities for 75-year and infinite
                        horizons, including separate reporting for social
                        insurance programs
                        o Statement of annual cash flows for programs and
                        activities
                        o Reconciliation of changes from prior period
                        Statement
                        o Presentation of information using different
                        measures of sustainability and estimates of financial
                        burden on different age cohorts and other
                        demographics
                        o Explanation of assumptions used and sensitivity
                        analyses

           o First Statement of Fiscal Sustainability due no later than March
           31, 2008

Additional Cost Information on Legislative Proposals before Adoption

           o Before a Member of the House or Senate calls up for
           consideration on the floor of either House a bill or joint
           resolution or an amendment thereto that contains a proposal that
           would result in a significant increase or decrease in revenues or
           in mandatory spending, that Member shall obtain from CBO a
           statement of the long-term costs of such bill, joint resolution,
           or amendment.

                        o CBO and Budget committees to jointly define
                        "significant" for each Congress
                        o "Long-term costs" are those financial costs over at
                        least a 40-year period

           o The statement from CBO shall be provided to the Members of
           either House, as applicable, and shall be published in the
           Congressional Record

GAO Report on the Financial Condition of the U.S. Government

           o The Comptroller General shall annually report to the Congress
           his assessment of the financial condition of the U.S. Government.
           Report shall include analyses of--

                        o the Consolidated Financial Statement (CFS) and the
                        Summary Financial Report
                        o results of GAO's latest long-term fiscal
                        simulations
                        o the President's Statement of Fiscal Exposures
                        o the adequacy of information regarding long-term
                        cost implications of existing and proposed policies
                        o the Statement of Fiscal Sustainability
                        o statutorily-required CBO and JCT reports for the
                        prior fiscal year

           First annual report due no later than January 31, 2009

           o

(450620)

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References

Visible links
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1080SP
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-05-690
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-06-276
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-03-213
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-235R
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-761T
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-983R
  30. http://www.gao.gov/
  31. http://www.gao.gov/
  32. http://www.gao.gov/fraudnet/fraudnet.htm
  33. mailto:[email protected]
  34. mailto:[email protected]
  35. mailto:[email protected]
*** End of document. ***