Long-Term Budget Outlook: Saving Our Future Requires Tough
Choices Today (11-JAN-07, GAO-07-342T).
This testimony, given by David M. Walker, Comptroller General of
the United States before the Senate Committee on the Budget,
addresses the nation's long-term fiscal outlook and the challenge
it presents. However, the outlook is not good. Continuing down
this current fiscal path would gradually erode, if not suddenly
damage, out economy, our standard of living, and ultimately even
our domestic tranquility and national security. The five major
points of the testimony are: (1) The current fiscal condition is
worse than advertised, (2) the long-term fiscal outlook is both
imprudent and unsustainable, (3) improvements in information and
processes are needed and can help, (4) meeting out long-term
fiscal challenge will require tough choices, bi-partisan
cooperation, and compromise, and lastly (5) the time for action
is now.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-342T
ACCNO: A64786
TITLE: Long-Term Budget Outlook: Saving Our Future Requires
Tough Choices Today
DATE: 01/11/2007
SUBJECT: Accrual basis accounting
Budget deficit
Budget functions
Cost analysis
Financial records
Fiscal policies
Future budget projections
Social security benefits
Strategic planning
Unified budgets
Financial analysis
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GAO-07-342T
* [1]LONG-TERM BUDGET OUTLOOK
* [2]Saving Our Future Requires Tough Choices Today
* [3]Our Fiscal and Financial Condition Is Worse Than Advertised
* [4]The Long-term Fiscal Outlook
* [5]Process and Presentational Changes to Increase
Transparency
* [6]Meeting the Long-Term Fiscal Challenge Requires
Cooperation
* [7]Concluding Remarks
* [8]Contacts and Acknowledgments
* [9]Appendix I: Ideas for Improving the Transparency of Long-ter
* [10]Supplemental Reporting in the President's Annual Budget
Subm
* [11]Additional Executive Branch Reports
* [12]Additional Cost Information on Proposals before Adoption
* [13]GAO Reports
* [14]Other Areas in Which GAO Has Suggested That Congress
Might C
* [15]Order by Mail or Phone
Testimony
Before the Committee on the Budget, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 10:30 a.m. EST
Thursday, January 11, 2007
LONG-TERM BUDGET OUTLOOK
Saving Our Future Requires Tough Choices Today
Statement of David M. Walker Comptroller General of the United States
GAO-07-342T
Chairman Conrad, Senator Gregg, Members of the Committee:
I appreciate this invitation to talk with you about our nation's long-term
fiscal outlook and the challenge it presents. Your decision to begin this
Congress with a hearing on this important issue demonstrates the
seriousness with which this Committee views this challenge and your
commitment to begin to address it.
The picture I will lay out for you today is not a pretty one and it's
getting worse with the passage of time. But this nation has met difficult
challenges--including challenges to its very existence--in the past and
I'm confident that we can do so again. This is a great nation with much to
be proud of and much to be thankful for. But today we are failing in one
of our most important stewardship responsibilities--our duty to pass on a
country better positioned to deal with the challenges of the future than
the one we were given. As members of this Committee know, continuing on
our current fiscal path would gradually erode, if not suddenly damage, our
economy, our standard of living, and ultimately even our domestic
tranquility and our national security.
My "bottom line" message today is no surprise to members of this
Committee:
o Our current financial condition is worse than advertised.
o Our long-term fiscal outlook is both imprudent and
unsustainable.
o Improvements in information and processes are needed and can
help.
o Meeting our long-term fiscal challenge will require tough
choices, bi-partisan cooperation and compromise.
o The time for action is now!
As widely reported, the $248 billion fiscal year 2006 unified
budget deficit was lower than originally forecast and lower than
last year's deficit of $318 billion. While this improvement in the
1-year fiscal picture is better than a worsening in that picture,
it did not fundamentally change our long-term fiscal outlook. In
fact, the U.S. government's total reported liabilities, net social
insurance commitments, and other fiscal exposures continue to grow
and now total approximately $50 trillion, representing
approximately four times the nation's total output, or gross
domestic product (GDP) in fiscal year 2006, up from about $20
trillion, or two times GDP in fiscal year 2000.
The overall picture of the long-term fiscal outlook is not news to
this committee. However, the long-term challenge is fast becoming
a short-term one as the first of the baby boomers become eligible
for early retirement under Social Security on January 1,
2008--less than one year--and for Medicare benefits in 2011--less
than 4 years from now. 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 fiscal path. Herbert
Stein once said that something that is not sustainable will stop.
That, however, should not give us comfort. It is more prudent to
change the path than to wait until a crisis occurs.
And that brings me to my next point. While restraint in the near
term and efforts to balance the budget over the next 5 years can
be positive, it is important that actions to achieve this also
address the long-term fiscal outlook. 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.
Our Fiscal and Financial Condition Is Worse Than Advertised
Our government produces two types of measures--budget and
financial--which further break down into three different numbers
that can be seen as indicators of our current financial condition:
the unified budget deficit, the on-budget deficit and the net
operating cost or accrual deficit. No one of these alone is
enough--we should look at all of them. The most commonly reported
measure is the unified budget deficit. This is a largely
cash-based number that represents the difference between revenues
and outlays for the government as a whole. It is an important
measure since it is indicative of the government's draw on today's
credit markets--and its claim on today's economy. This measure,
however, masks the difference between Social Security's cash flows
and those for the rest of the budget. Therefore we also need to
look beneath the unified deficit at the on-budget deficit--what I
like to call the "operating deficit." And, finally, we should be
looking at the financial statements' report of net operating
cost--the accrual-based deficit.
The difference between the on-budget deficit and the unified
budget deficit is the surplus in Social Security and the U.S.
Postal Service. Excluding consideration of the $185 billion
surplus in Social Security's cash flows and a $1 billion surplus
in the Postal Service, the on-budget deficit was $434 billion in
2006. Figure 1 shows graphically how the on-budget deficit and the
off-budget surplus have related and combine to lead to the unified
deficit. Since the Social Security trust fund invests any receipts
not needed to pay benefits in Treasury securities, this surplus
reduces the amount the Treasury must borrow from the public. As I
will note later, this pattern of cash flows is important--and it
is projected to come to and end just 10 years from now.
Figure 1: Surplus or Deficit as a Share of GDP, Fiscal Years
1962-2006
Sources: Office of Management and Budget, Department of the
Treasury, and Congressional Budget Office.
The third number, net operating cost, is the amount by which costs
exceed revenue and it is reported in the federal government's
financial statements, which are prepared using generally accepted
accounting principles. Costs are recorded on an accrual
basis--namely, in the period when goods are used or services are
performed as opposed to when the resulting cash payments are made.
However, most revenues, on the other hand, are recorded on the
modified cash basis--that is, they are recorded when collected.
The net operating cost can be thought of as the accrual deficit.
The accrual measure primarily provides more information on the
longer-term implications of today's policy decisions and
operations by showing certain costs incurred today but not payable
for years to come, such as civilian and military pensions and
retiree health care.^1
All three of these numbers are informative. However, neither
accrual nor cash measures alone provide a full picture of the
government's fiscal condition or the cost of government. Used
together, they present complementary information and provide a
more comprehensive picture of the government's financial condition
today and fiscal position over time. For example, the unified
budget deficit provides information on borrowing needs and current
cash flow. The accrual deficit provides information on the current
cost of government, but it does not provide information on how
much the government has to borrow in the current year to finance
government activities. Also, while accrual deficits provide more
information on the longer-term consequences of current government
activities, they do not include the longer-term cost associated
with social insurance programs like Social Security and Medicare.
In addition, they are not designed to provide information about
the timing of payments and receipts, which can be very important.
Therefore, just as investors need income statements, statements of
cash flow, and balance sheets to understand a business's financial
condition, both cash and accrual measures are important for
understanding the government's financial condition.^2 Table 1
below shows the three measures for fiscal year 2005 and fiscal
year 2006.
Table 1: Fiscal Year 2005 and 2006 Deficits and Net Operating Cost
Dollars in billions
Fiscal year 2005 Fiscal year 2006
On-budget deficit ($494) ($434)
Unified deficit (318) (248)
Net operating cost^a (760) (450)
Sources: Office of Management and Budget and Department of the
Treasury.
aFiscal year 2005 net operating cost included a significant
negative actuarial adjustment and 2006 included a significant
positive adjustment primarily due to changes in interest rate
assumptions.
Although looking at both the cash and accrual measures provides a
more complete picture of the government's fiscal stance today and
over time than looking at either alone, even these together do not
tell us the full story. For example, all of these show an
improvement between fiscal year 2005 and fiscal year 2006.
However, the fundamental drivers of our long-term challenge are
largely the same. To understand the long-term implications of our
current path requires more than a single year's snapshot. In this
regard, the long-term outlook has worsened significantly in the
last several years. That is why for more than a decade GAO has
been running simulations to tell this longer-term story. Cash
deficits begin 2017
The Long-term Fiscal Outlook
Long-term fiscal simulations by GAO, CBO and others all show that
we face large and growing structural deficits driven primarily by
rising health care costs and known demographic trends. GAO runs
simulations under two sets of assumptions. One takes the
legislatively-mandated baseline from CBO for the first 10 years
and then keeps discretionary spending and revenues constant as a
share of GDP while letting Social Security, Medicare, and Medicaid
grow as projected by the Trustees and CBO under midrange
assumptions.^3 The other perhaps more realistic scenario based on
the Administration's announced policy preferences modifies this
baseline by letting discretionary spending grow with the economy
and extending all expiring tax provisions.^4 As figure 2 shows,
deficits spiral out of control under either scenario. We will be
updating these figures with the release of the new CBO baseline
later this month, but even with the lower deficit in 2006, the
long-term picture will remain daunting.
Figure 2: Unified Surpluses and Deficits as a Share of GDP under
Alternative Fiscal Policy Simulations
Source: GAO's August 2006 analysis.
Note: Assume currently scheduled Social Security benefits are paid
in full throughout the simulation period.
Looking more closely at each scenario gives a fuller understanding
of what the impact of continuing these trends would have on what
government does. And looking back to 2001 also shows us how much
worse the situation has become. As I noted, despite some recent
improvements in short-term deficits, the long-term outlook is
moving in the wrong direction.
Figures 3 and 4 show the composition of spending under our
"Baseline Extended" scenario in 2001 and 2006. Even with
short-term surpluses, we had a long-term problem in 2001, but it
was more than 40 years out. Certainly an economic slowdown and
budget decisions driven by the attacks of 9/11 and the need to
respond to natural disasters have contributed to the change in
outlook. However, these items alone do not account for the
dramatic worsening. Tax cuts also contributed but the single
largest contributor to the deterioration of our long-term outlook
was the passage of the Medicare Prescription Drug Bill in 2003.
Figure 3: Composition of Spending as a Share of GDP under Baseline
Extended, January 2001
Source: GAO's January 2001 analysis.
Note: All other spending is net of offsetting interest receipts in
2015-2040.
Figure 4: Composition of Spending as a Share of GDP under Baseline
Extended, August 2006
Source: GAO's August 2006 analysis.
Notes: 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, and (3) increased revenue from tax-deferred retirement
accounts. After 2016, revenue as a share of GDP is held constant.
Figure 4 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
imbalance. This is even clearer under the more realistic scenario
as shown in figure 5. Estimated growth in the major entitlement
programs 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. 4) or lower as shown in figure 5.
Figure 5: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2006 and All Expiring
Tax Provisions Are Extended
Source: GAO's August 2006 analysis.
Both these simulations illustrate that without 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. A
government that in our children's lifetimes does nothing more than
pay interest on its debt and mail checks to retirees and some of
their health providers is unimaginable.
Although Social Security is a major part of the fiscal challenge,
contrary to popular perception, it is far from our biggest
challenge. While today Social Security spending exceeds federal
spending for Medicare and Medicaid that will change. Over the past
several decades, health care spending on average has grown much
faster than the economy, absorbing increasing shares of the
nation's resources, and this rapid growth is projected to
continue. CBO estimates that Medicare and Medicaid spending will
reach 6.3 percent of GDP in 2016, up from 4.6 this year (2007),
while spending for Social Security will only reach 4.7 percent of
GDP in 2016 up from 4.2 percent this year. For this reason and
others, rising health care costs pose a fiscal challenge not just
to the federal budget but also to states, American business, and
our society as a whole.
While there is always some uncertainty in long-term projections,
two things are certain: the population is aging and the baby boom
generation is nearly at 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 6
shows the total future draw on the economy represented by Social
Security, Medicare, and Medicaid. Under the 2006 Trustees'
intermediate estimates and CBO's long-term Medicaid estimates,
federal spending for these entitlement programs combined will grow
to 15.5 percent of GDP in 2030 from today's 9 percent. It is clear
that taken together, Social Security, Medicare, and Medicaid under
current law represent an unsustainable burden on future
generations.
Figure 6: Social Security, Medicare, and Medicaid Spending
Source: GAO analysis based on data from the Office of the Chief
Actuary, Social Security Administration, Office of the Actuary,
Centers for Medicare and Medicaid Services, and the Congressional
Budget Office.
Notes: Social Security and Medicare projections based on the
intermediate assumptions of the 2006 Trustees' Reports. Medicaid
projections based on CBO's August 2006 short-term Medicaid
estimates and CBO's December 2005 long-term Medicaid projections
under midrange assumptions.
While Social Security, Medicare and Medicaid 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 programs, responsibilities, and activities that
obligate it to future spending or create an expectation for
spending and potentially limit long-term budget flexibility. 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.
As shown in figure 7, despite improvement in both the fiscal year
2006 reported net operating cost and the cash-based budget
deficit, the U.S. government's major reported liabilities, social
insurance commitments, and other fiscal exposures continue 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. We all know
that it is hard to make sense of what "trillions" means. One way
to think about it is: if we wanted to put aside today enough to
cover these promises, it would take $170,000 for each and every
American or approximately $440,000 per American household.
Clearly, despite recent progress on our short-term deficits, we
have been moving in the wrong direction in connection with our
long-range imbalance in recent years.
Figure 7: Major Reported Fiscal Exposures (Dollars in Trillions)
Source: Department of Treasury.
Notes: Data from 2000 and 2006 Financial Report of the United
States Government. Estimates for Social Security and Medicare are
at present value as of January 1 of each year and all other data
are as of September 30. Totals and percent increases may not add
due to rounding.
Process and Presentational Changes to Increase Transparency and
Focus on Long-term Consequences Can Help
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 long-term fiscal challenge and the
broader challenge of modernizing government for the 21st century.
I have said that Washington suffers from myopia and tunnel vision.
This can be especially true in the budget debate in which we focus
on one program at a time and the deficit for a single year or
possibly the costs over 5 years without asking about the bigger
picture and whether the long term is getting better or worse. We
at GAO are in the transparency and accountability business.
Therefore it should come as no surprise that I believe we need to
increase the understanding of and focus on the long term in our
policy and budget debates. To that end--as I noted earlier--I have
been talking with a number of members of the Senate and the House
as well as various groups concerned about this issue concerning a
number of steps that might help. I've attached a summary of some
of these ideas to this statement. Let me highlight several
critical elements here.
o The President's budget proposal should again cover 10 years.
This is especially important given that some policies--both
spending and tax--cost significantly more (or lose significantly
more revenue) in the second 5 years than in the first. In
addition, the budget should disclose the impact of major tax or
spending proposals on the short, medium and long term.
o The executive branch should also provide information on fiscal
exposures--both spending programs and tax expenditures--that is,
the long-term budget costs represented by currently individual
programs, policies or activities as well as the total.
o The budget process needs to pay more attention to the long-term
implication of the choices being debated. For example, elected
representatives should be provided with more explicit information
on the long-term costs of any major tax or spending proposal
before it is voted upon. It is sobering to recall that during the
debate over adding prescription drug coverage to Medicare, a great
deal of attention was paid to whether the 10-year cost was over or
under $400 billion. Not widely publicized--and certainly not
surfaced in the debate--was that the present value of the
long-term cost of this legislation was about $8 trillion!
Of course, when you are in a hole, the first thing to do is stop
digging. I have urged reinstitution of the statutory
controls--both meaningful caps on discretionary spending and
pay-as-you-go (PAYGO) on both the tax and spending sides of the
ledger--that expired in 2002. Given the severity of our current
challenge, Congress may wish to look beyond the return to PAYGO
and discretionary caps. Mandatory spending cannot remain on
autopilot. We have suggested that Congress might wish to design
"triggers" for mandatory programs--some measure that would prompt
action when the spending path increased significantly. In
addition, Congress may wish to look at rules to govern the use of
"emergency supplementals." However, as everyone in this committee
knows, these steps alone will not solve the problem. That is why
building in more consideration of the long-term impact of
decisions is necessary.
Meeting the Long-Term Fiscal Challenge Requires Cooperation and
Compromise� and Action Should Not Be Delayed
The government can help ease future fiscal burdens through
spending reductions, revenue actions, or both that reduce debt
held by the public 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. To "grow our way out" of the
current long-term fiscal gap would require sustained economic
growth far beyond that experienced in U.S. economic history since
World War II.
While the appropriate level of revenues will be part of the debate
about our fiscal future, making no changes to Social Security,
Medicare, Medicaid, and other drivers of the long-term fiscal gap
would require ever increasing tax levels--and that seems both
inappropriate and implausible. Accordingly, substantive reform of
Social Security and our major health programs remains critical to
recapturing our future fiscal flexibility. Similarly, given
demographic and health care cost trends, the size of the spending
cuts necessary to hold revenues at today's share of GDP seems
inadequate and implausible. Waiting only makes matters worse.
GAO's simulations show that if no action is taken, balancing the
budget in 2040 could require actions as large as cutting total
federal spending by 60 percent or raising federal taxes to 2 times
today's level. There are no "easy answers" and everything must be
on the table.
Although the long-term outlook is driven by Social Security and
health care costs, this does not mean the rest of the budget can
be exempt from scrutiny. Many tax expenditures operate like
entitlement programs--but with even less scrutiny. Other programs
and activities were designed for a very different time. To
recapture our fiscal flexibility and bring our government and its
programs in line with 21^st century realities requires a
fundamental reexamination of major spending and tax policies and
priorities.^5 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. This discussion
will not be easy, but it is critical.
For many years those of us who talk about the need to put Social
Security on a sustainable course and to reform Medicare have
talked about the benefits of early action. Acting sooner rather
than later can turn compound interest from an enemy to an ally.
Acting sooner rather than later permits changes to be phased in
more gradually and gives those affected time to adjust to the
changes. Delay does not avoid action--it just makes the steps that
have to be taken more dramatic and potentially harder.
Unfortunately, there has already been too much delay. And now the
future is upon us.
Next year members of the baby boom generation start to leave the
labor force. Reflecting this demographic shift, CBO projects the
average annual growth rate of real GDP will decline from 3.1
percent in 2008 to 2.6 percent in the period 2012-2016. This
slowing of economic growth will come just as spending on Social
Security, Medicare and Medicaid will begin to
accelerate--accounting for 56 percent of all federal spending by
2016 compared to 43 percent in 2006.
As I noted earlier, today Social Security's cash surplus helps
offset the deficit in the rest of the budget, but growth in Social
Security spending is expected to increase from an estimated 4.8
percent in 2008 to 6.5 percent in 2016. The result, as shown in
figure 8, is that the Social Security surpluses begin a permanent
decline in 2009. At that time the rest of the budget will begin to
feel the squeeze since the capacity of Social Security surpluses
to offset deficits in the rest of the budget will begin to shrink.
In 2017 Social Security will no longer run a cash surplus and will
begin adding to the deficit. That year Social Security will need
to redeem the special securities it holds in order to pay
benefits. Treasury will honor those claims--the United States has
never defaulted. But there is no free money. The funds to redeem
those securities will have to come from higher taxes, lower
spending on other programs, higher borrowing from the public, or a
combination of all three.
Figure 8: Projected Cash Surpluses and Deficits in the Combined
Social Security Trust Fund
Source: GAO analysis of data from the Office of the Chief Actuary,
Social Security Administration.
Note: Projections based on the intermediate assumptions of the
2006 Trustees' Reports. The consumer price index is used to adjust
from current to constant dollars.
Concluding Remarks
It is a hopeful sign that we are here today. By beginning the year
not with a discussion of the current year's budget but with a
focus on the long term, this committee is showing the kind of
leadership needed to tackle this challenge.
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 Concord 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--resonates with the audiences. Although the
major participants have been Concord, GAO, Brookings and Heritage,
others include such organizations as the Committee for Economic
Development (CED); the American Institute of Certified Public
Accountants (AICPA); the Association of Government Accountants
(AGA); the National Association of State Auditors, Comptrollers
and Treasurers (NASACT); and AARP. The FWUT also has received the
active support and involvement of community leaders, local
colleges and universities, the media, the business community and
both former and current elected officials. We have been to 17
cities to-date. The discussion has been broadcast on public
television stations in Atlanta and Philadelphia. Just this morning
I returned from an event at the John Glenn School of Public
Affairs at Ohio State University in Columbus, Ohio, in which OMB
Director Portman and former Senator Glenn participated.
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 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 war 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 and how.
This is a great nation. 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 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 time for action is now.
Mr. Chairman, Senator Gregg, 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
endeavor.
Contacts and Acknowledgments
For further information on this testimony, please contact Susan J.
Irving at (202) 512-9142 or [email protected]. Contact points for
our Offices of Congressional Relations and Public Affairs may be
found on the last page of this testimony. Individuals making key
contributions to this testimony include Jay McTigue, Assistant
Director, and Melissa Wolf.
^1 For a discussion of how the accrual and cash deficits relate to each
other see GAO, Understanding Similarities and Differences between Accrual
and Cash Deficits, [22]GAO-07-117SP (Washington, D.C.: December 2006) and
forthcoming update.
^2 GAO is responsible for auditing the financial statements included in
the Financial Report, but we have been unable to express an opinion on
them for ten years because the federal government could not demonstrate
the reliability of significant portions of the financial statements,
especially in connection with the Department of Defense. Accordingly,
amounts taken from the Financial Report may not be reliable.
^3 Social Security and Medicare spending is based on the May 2006
Trustees' intermediate projections. Medicaid spending is based on CBO's
December 2005 long-term projections under midrange assumptions.
^4Additional information about the GAO model, its assumptions, data, and
charts can be found at http://www.gao.gov/special.pubs/longterm/ .
^5 GAO, 21 Century Challenges: Reexamining the Base of the Federal
Government^st, [24]GAO-05-325SP (Washington, D.C.: February 2005) and
Suggested Areas for Oversight for the 110th Congress, [25]GAO-07-235R
(Washington, D.C.: Nov. 17, 2006).
Appendix I: Ideas for Improving the Transparency of Long-term
Costs and the Attention Paid to These Costs before Decisions
Are Made
Supplemental Reporting in the President�s Annual Budget Submission
o Produce an annual Statement of Fiscal Exposures, including a
concise list and description of exposures, cost estimates where
possible, and an assessment of methodologies and data used to
produce such cost estimates.
o Increase the transparency of tax expenditures by including them
in the annual Fiscal Exposures Statement and, where possible, also
showing them along with spending and credit programs in the same
policy area.
o Provide information on the impact of major tax or spending
proposals on short-term, midterm, and long-term fiscal exposures
and on the path of surplus/deficit and debt as percent of gross
domestic product (GDP) over 10-year and longer-term horizons (and
assuming no sunset if sunset is part of the proposal).
o Cover 10 years in the budget.
o Consider requiring the President to include in his annual budget
submission a long-term fiscal goal (e.g., balance, surplus, or
deficit as percent of GDP).
Additional Executive Branch Reports
o Prepare and publish a Summary Annual Report or Citizen's Summary
that summarizes, in a clear, concise, plain English, and
transparent manner, key financial and performance information
included in the Consolidated Financial Report.
o Prepare and publish a report on long-range fiscal sustainability
every 2 to 4 years.
Additional Cost Information on Proposals before Adoption
o Require improved disclosure--at the time proposals are debated
but before they are adopted--of the long-term costs of individual
mandatory spending and tax proposals over a certain size and for
which costs will ramp up over time.
GAO Reports
An annual report or reports by GAO including comments on the
Consolidated Financial Statement (CFS), results of the latest
long-term fiscal simulations, comments on the adequacy of
information regarding long-term cost implications of existing and
proposed policies in the previous year as well as any other
significant financial and fiscal issues.
Other Areas in Which GAO Has Suggested That Congress Might
Consider Changing the Budget Treatment
o Use accrual budgeting for the following areas where cash basis
obligations do not adequately represent the government's
commitment:
o employee pension programs (pre-Federal Employee
Retirement System employees),
o retiree health programs, and
o federal insurance programs, such as the Pension
Benefit Guaranty Corporation and crop insurance.
Explore techniques for expanding accrual budgeting to
o environmental cleanup and
o social insurance--could consider deferring
recognition of social insurance receipts until they
are used to make payments in the future (this was
suggested in GAO's accrual budgeting report as an
idea to explore, possibly with a commission designed
to explore budget concepts).
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References
Visible links
22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-117SP
24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-235R
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