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
			  Compromiseï¿½ 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 Presidentï¿½s 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).
								
           GAOï¿½s Mission								

           The Government Accountability Office, the audit, evaluation and
           investigative arm of Congress, exists to support Congress in
           meeting its constitutional responsibilities and to help improve
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           informed oversight, policy, and funding decisions. GAO's
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           accountability, integrity, and reliability.
			  
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			  Congressional Relations

           Gloria Jarmon, Managing Director, [email protected] (202)
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(450562)

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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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