The Nation's Long-Term Fiscal Outlook: January 2008 Update	 
(21-MAR-08, GAO-08-591R).					 
                                                                 
Since 1992, GAO has published long-term fiscal simulations of	 
what might happen to federal deficits and debt levels under	 
varying policy assumptions. We developed our long-term model in  
response to a bipartisan request from Members of Congress who	 
were concerned about the long-term effects of fiscal policy. Our 
simulations were updated with Congressional Budget Office (CBO's)
January budget and economic projections and continue to indicate 
that the long-term federal fiscal outlook remains unsustainable. 
This update combined with our analysis of the fiscal outlook of  
state and local governments demonstrates that the fiscal	 
challenges facing all levels of government are linked and should 
be considered in a strategic and integrated manner. We update our
simulations three times a year as new estimates become available 
from CBO's Budget and Economic Outlook (January), Social Security
and Medicare Trustees Reports (spring), and CBO's Budget and	 
Economic Outlook: An Update (late summer). This product responds 
to congressional interest in receiving updated simulation	 
results.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-591R					        
    ACCNO:   A81369						        
  TITLE:     The Nation's Long-Term Fiscal Outlook: January 2008      
Update								 
     DATE:   03/21/2008 
  SUBJECT:   Balanced budgets					 
	     Budget cuts					 
	     Budget deficit					 
	     Deficit reduction					 
	     Econometric modeling				 
	     Economic analysis					 
	     Economic growth					 
	     Federal social security programs			 
	     Fiscal policies					 
	     Future budget projections				 
	     Gross national product				 
	     Medicaid						 
	     Medicare						 
	     Fiscal imbalance					 

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GAO-08-591R

This is the accessible text file for GAO report number GAO-08-591R 
entitled 'The Nation's Long-Term Fiscal Outlook: January 2008 Update' 
which was released on March 21, 2008.

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United States Government Accountability Office:
GAO: 

The Nation's Long-Term Fiscal Outlook: 
January 2008 Update: 

GAO-08-591R: 

GAOï¿½s Long-Term Fiscal Simulations: 

Since 1992, GAO has published long-term fiscal simulations of what 
might happen to federal deficits and debt levels under varying policy 
assumptions. We developed our long-term model in response to a 
bipartisan request from Members of Congress who were concerned about 
the long-term effects of fiscal policy. 

Our simulations were updated with CBOï¿½s January budget and economic 
projections and continue to indicate that the long-term federal fiscal 
outlook remains unsustainable. This update combined with our analysis 
of the fiscal outlook of state and local governments demonstrates that 
the fiscal challenges facing all levels of government are linked and 
should be considered in a strategic and integrated manner. 

We update our simulations three times a year as new estimates become 
available from: 

* CBOï¿½s Budget and Economic Outlook (January); 

* Social Security and Medicare Trustees Reports (spring), and; 

* CBOï¿½s Budget and Economic Outlook: An Update (late summer). 

This product responds to congressional interest in receiving updated 
simulation results. Additional information about the GAO model, its 
assumptions, data, and charts can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. For more information, 
contact Susan J. Irving at (202) 512-9142 or [email protected]. 

The Long-Term Fiscal Challenge Looms, as the Baby Boom Generation 
Begins to Retire: 

Our updated simulations continue to illustrate that the long-term 
fiscal outlook is unsustainable. (See fig. 1.) Despite a 3-year decline 
in the unified budget deficit, the federal government still faces large 
and growing structural deficits driven primarily by rising health care 
costs and known demographic trends. Last month, a baby boomer claimed 
Social Security retirement benefits for the first time, and this cohort 
will be eligible for Medicare benefits in less than 3 years. According 
to the Social Security Administration nearly 80 million Americans will 
become eligible for Social Security retirement benefits over the next 
two decades--an average of more than 10,000 per day. Although Social 
Security is important because of its size, the real driver of the long-
term fiscal outlook is health care spending. Medicare and Medicaid are 
both large and projected to continue growing rapidly in the future. 

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

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 2000; 
Percent of GDP, Baseline extended: 2.433; 
Percent of GDP, Alternative simulation: 2.433. 

Fiscal year: 2001; 
Percent of GDP, Baseline extended: 1.274; 
Percent of GDP, Alternative simulation: 1.274. 

Fiscal year: 2002; 
Percent of GDP, Baseline extended: -1.52; 
Percent of GDP, Alternative simulation: -1.52. 

Fiscal year: 2003; 
Percent of GDP, Baseline extended: -3.495; 
Percent of GDP, Alternative simulation: -3.495. 

Fiscal year: 2004; 
Percent of GDP, Baseline extended: -3.588. 
Percent of GDP, Alternative simulation: -3.588. 

Fiscal year: 2005; 
Percent of GDP, Baseline extended: -2.599; 
Percent of GDP, Alternative simulation: -2.599. 

Fiscal year: 2006; 
Percent of GDP, Baseline extended: -1.906; 
Percent of GDP, Alternative simulation: -1.906. 

Fiscal year: 2007; 
Percent of GDP, Baseline extended: -1.192; 
Percent of GDP, Alternative simulation: -1.192. 

Fiscal year: 2008; 
Percent of GDP, Baseline extended: -1.542; 
Percent of GDP, Alternative simulation: -1.818. 

Fiscal year: 2009; 
Percent of GDP, Baseline extended: -1.337; 
Percent of GDP, Alternative simulation: -2.16. 

Fiscal year: 2010; 
Percent of GDP, Baseline extended: -1.545; 
Percent of GDP, Alternative simulation: -2.841. 

Fiscal year: 2011; 
Percent of GDP, Baseline extended: -0.711; 
Percent of GDP, Alternative simulation: -3.223 

Fiscal year: 2012; 
Percent of GDP, Baseline extended: 0.504; 
Percent of GDP, Alternative simulation: -3.122. 

Fiscal year: 2013; 
Percent of GDP, Baseline extended: 0.338; 
Percent of GDP, Alternative simulation: -3.741. 

Fiscal year: 2014; 
Percent of GDP, Baseline extended: 0.509; 
Percent of GDP, Alternative simulation: -3.825. 

Fiscal year: 2015; 
Percent of GDP, Baseline extended: 0.594; 
Percent of GDP, Alternative simulation: -4.198. 

Fiscal year: 2016; 
Percent of GDP, Baseline extended: 0.463; 
Percent of GDP, Alternative simulation: -4.649. 

Fiscal year: 2017; 
Percent of GDP, Baseline extended: 0.705; 
Percent of GDP, Alternative simulation: -4.832. 

Fiscal year: 2018; 
Percent of GDP, Baseline extended: 0.998; 
Percent of GDP, Alternative simulation: -5.184. 

Fiscal year: 2019; 
Percent of GDP, Baseline extended: 0.715; 
Percent of GDP, Alternative simulation: -5.347. 

Fiscal year: 2020; 
Percent of GDP, Baseline extended: 0.435; 
Percent of GDP, Alternative simulation: -5.519. 

Fiscal year: 2021; 
Percent of GDP, Baseline extended: 0.138; 
Percent of GDP, Alternative simulation: -5.945. 

Fiscal year: 2022; 
Percent of GDP, Baseline extended: -0.175. 
Percent of GDP, Alternative simulation: -6.401. 

Fiscal year: 2023; 
Percent of GDP, Baseline extended: -0.606; 
Percent of GDP, Alternative simulation: -6.986. 

Fiscal year: 2024; 
Percent of GDP, Baseline extended: -0.957; 
Percent of GDP, Alternative simulation: -7.525. 

Fiscal year: 2025; 
Percent of GDP, Baseline extended: -1.326; 
Percent of GDP, Alternative simulation: -8.062. 

Fiscal year: 2026; 
Percent of GDP, Baseline extended: -1.724; 
Percent of GDP, Alternative simulation: -8.677. 

Fiscal year: 2027; 
Percent of GDP, Baseline extended: -2.038; 
Percent of GDP, Alternative simulation: -9.211. 

Fiscal year: 2028; 
Percent of GDP, Baseline extended: -2.461; 
Percent of GDP, Alternative simulation: -9.856. 

Fiscal year: 2029; 
Percent of GDP, Baseline extended: -2.786; 
Percent of GDP, Alternative simulation: -10.408. 

Fiscal year: 2030; 
Percent of GDP, Baseline extended: -3.109; 
Percent of GDP, Alternative simulation: -10.965. 

Fiscal year: 2031; 
Percent of GDP, Baseline extended: -3.528; 
Percent of GDP, Alternative simulation: -11.623. 

Fiscal year: 2032; 
Percent of GDP, Baseline extended: -3.849; 
Percent of GDP, Alternative simulation: -12.186; 

Fiscal year: 2033; 
Percent of GDP, Baseline extended: -4.269; 
Percent of GDP, Alternative simulation: -12.853. 

Fiscal year: 2034; 
Percent of GDP, Baseline extended: -4.59; 
Percent of GDP, Alternative simulation: -13.429. 

Fiscal year: 2035; 
Percent of GDP, Baseline extended: -4.912; 
Percent of GDP, Alternative simulation: -13.948. 

Fiscal year: 2036; 
Percent of GDP, Baseline extended: -5.331; 
Percent of GDP, Alternative simulation: -14.623. 

Fiscal year: 2037; 
Percent of GDP, Baseline extended: -5.651; 
Percent of GDP, Alternative simulation: -15.206. 

Fiscal year: 2038; 
Percent of GDP, Baseline extended: -6.061; 
Percent of GDP, Alternative simulation: -15.88. 

Fiscal year: 2039; 
Percent of GDP, Baseline extended: -6.364; 
Percent of GDP, Alternative simulation: -16.446. 

Fiscal year: 2040; 
Percent of GDP, Baseline extended: -6.667; 
Percent of GDP, Alternative simulation: -17.02. 

Fiscal year: 2041; 
Percent of GDP, Baseline extended: -7.072; 
Percent of GDP, Alternative simulation: -17.696. 

Fiscal year: 2042; 
Percent of GDP, Baseline extended: -7.384; 
Percent of GDP, Alternative simulation: -18.281. 

Fiscal year: 2043; 
Percent of GDP, Baseline extended: -7.701; 
Percent of GDP, Alternative simulation: -18.872. 

Fiscal year: 2044; 
Percent of GDP, Baseline extended: -8.122; 
Percent of GDP, Alternative simulation: -19.569. 

Fiscal year: 2045; 
Percent of GDP, Baseline extended: -8.453; 
Percent of GDP, Alternative simulation: -20.178. 

Fiscal year: 2046; 
Percent of GDP, Baseline extended: -8.788; 
Percent of GDP, Alternative simulation: -20.794 [End of simulation]. 

Fiscal year: 2047; 
Percent of GDP, Baseline extended: -9.226. 

Fiscal year: 2048; 
Percent of GDP, Baseline extended: -9.571. 

Fiscal year: 2049; 
Percent of GDP, Baseline extended: -9.92. 

Fiscal year: 2050; 
Percent of GDP, Baseline extended: -10.272. 

Source: GAO's January 2008 analysis. 

[End of figure] 

Figure 1 shows two alternative fiscal paths. The first is "baseline 
extended," which follows the Congressional Budget Office's (CBO) 
January baseline estimates for the first 10 years and then simply holds 
revenue and spending other than large entitlement programs constant as 
a share of gross domestic product (GDP). The second is an alternative 
based on historical trends and recent policy preferences. Under these 
alternative assumptions, discretionary spending grows with the economy 
rather than inflation during the first 10 years, Medicare physician 
payments are not reduced as in current law,[Footnote 1] and revenues 
are brought down to their historical level. 

Simulations are not forecasts or predictions. They are designed to ask 
the question "what if?" Our "what ifs" include what if discretionary 
spending is lower than the 20-year historical average and revenue 
higher than the historical average (as in baseline extended) or nearly 
at the historical averages (as in the alternative). Although the timing 
of deficits and the resulting debt buildup varies depending on the 
assumptions used, both simulations show that the federal government is 
on an unsustainable fiscal path. 

By definition, what is unsustainable will not be sustained. The 
question is how and when the nation's current imprudent and 
unsustainable path will end. At some point, action will be taken to 
change the nation's fiscal course. The longer action to deal with the 
nation's long-term fiscal outlook is delayed, the greater the risk that 
the eventual changes will be disruptive and destabilizing. Acting 
sooner rather than later will provide more time to phase in gradual 
changes, while also providing more time for those likely to be most 
affected to make compensatory changes. 

What Drives Our Nation's Bleak Long-Term Fiscal Outlook? 

The long-term fiscal outlook results from a large and persistent gap 
between expected revenues and expected spending. The spending that 
drives the outlook is primarily spending on the large federal 
entitlement programs (i.e., Medicare, Medicaid, and Social Security) 
especially health care programs. The retirement of the baby boom 
generation is one key element of this. Already the first members of the 
baby boom generation have begun receiving Social Security retirement 
benefits and in 2011 will become eligible for Medicare benefits. In the 
next two decades America's population will age dramatically, and 
relatively fewer workers will be asked to support ever larger costs for 
retirees. 

Although Social Security is a major part of the fiscal challenge, it is 
far from the biggest challenge. Spending on the major federal health 
programs (i.e., Medicare and Medicaid) represents a much larger, faster 
growing, and more immediate problem. In fact, the federal government's 
future obligations for Medicare Part D alone exceed the unfunded 
obligations for Social Security. Over the past several decades, health 
care spending per capita has grown on average about 2.5 percent faster 
than average annual GDP per capita absorbing increasing shares of the 
nation's resources, and this rapid growth is projected to continue. For 
this reason and others, rising health care costs pose a fiscal 
challenge not just to the federal budget but to American business and 
our economy and society as a whole. 

Figures 2 and 3 look behind the deficit path to the composition of 
federal spending under the two scenarios. Both figures show that the 
estimated growth in the major entitlement programs leads to an 
unsustainable fiscal future--whether revenues as a share of GDP are 
above historical levels, as in baseline extended, or at about 
historical levels as in the alternative simulation. 

Figure 2: Potential Fiscal Outcomes under Baseline Extended: Revenues 
and Composition of Spending as Shares of GDP: 

[See PDF for image] 

This figure is a combination line and stacked vertical bar graph, 
depicting the following data: 

Fiscal year: 2007; 
Revenue, percent of GDP: 18.8; 
Net interest, percent of GDP: 1.7; 
Social Security, percent of GDP: 4.3; 
Medicare and Medicaid, percent of GDP: 4.1; 
All other spending, percent of GDP: 9.9. 

Fiscal year: 2018; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 1.2; 
Social Security, percent of GDP: 4.9; 
Medicare and Medicaid, percent of GDP: 5.3; 
All other spending, percent of GDP: 8. 

Fiscal year: 2030; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 1.2; 
Social Security, percent of GDP: 6.3; 
Medicare and Medicaid, percent of GDP: 7.9; 
All other spending, percent of GDP: 8. 

Fiscal year: 2040; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 2.8; 
Social Security, percent of GDP: 6.6; 
Medicare and Medicaid, percent of GDP: 9.6; 
All other spending, percent of GDP: 8. 

Source: GAO's January 2008 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2018 because of (1) real bracket creep, (2) more 
taxpayers becoming subject to the alternative minimum tax (AMT), and 
(3) increased revenue from tax-deferred retirement accounts. After 
2018, 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. 

[End of figure] 

Figure 3: Potential Fiscal Outcomes under Alternative Simulation: 
Revenues and Composition of Spending as Shares of GDP: 

[See PDF for image] 

This figure is a combination line and stacked vertical bar graph, 
depicting the following data: 

Fiscal year: 2007; 
Revenue, percent of GDP: 18.8; 
Net interest, percent of GDP: 1.7; 
Social Security, percent of GDP: 4.3; 
Medicare and Medicaid, percent of GDP: 4.1; 
All other spending, percent of GDP: 9.9. 

Fiscal year: 2018; 
Revenue, percent of GDP: 17.9; 
Net interest, percent of GDP: 2.5; 
Social Security, percent of GDP: 4.9; 
Medicare and Medicaid, percent of GDP: 5.9; 
All other spending, percent of GDP: 9.7. 

Fiscal year: 2030; 
Revenue, percent of GDP: 18.6; 
Net interest, percent of GDP: 5.2; 
Social Security, percent of GDP: 6.3; 
Medicare and Medicaid, percent of GDP: 8.3; 
All other spending, percent of GDP: 9.7. 

Fiscal year: 2040; 
Revenue, percent of GDP: 18.6; 
Net interest, percent of GDP: 9.2; 
Social Security, percent of GDP: 6.6; 
Medicare and Medicaid, percent of GDP: 10.1; 
All other spending, percent of GDP: 9.7. 

Source: GAO's January 2008 analysis. 

Notes: Discretionary spending grows with GDP after 2008. The AMT 
exemption amount is retained at the 2007 level through 2018 and 
expiring tax provisions are extended. After 2018, revenue as a share of 
GDP is brought to its historical level of 18.3 percent 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. 

[End of figure] 

In these figures the category "all other spending" includes much of 
what many think of as "government"--discretionary spending on such 
activities as national defense, homeland security, veterans health 
benefits, national parks, highways and mass transit, foreign aid, plus 
mandatory spending on the smaller entitlement programs such as 
Supplemental Security Income, Temporary Assistance for Needy Families, 
and farm price supports.[Footnote 2] The growth in Social Security, 
Medicare, Medicaid, and interest on debt held by the public dwarfs the 
growth in all other types of spending. 

Under baseline extended we follow CBO's January baseline for the first 
10 years: tax provisions that are scheduled to expire are assumed to do 
so (including the temporary increase in the AMT exemption amount) and 
discretionary spending is assumed to grow with inflation. At the end of 
the 10-year period, revenues in baseline extended are at 20.3 percent 
of GDP--a couple of points above the 20-year historical average. 
Discretionary spending is at 6.1 percent of GDP--somewhat below the 20-
year historical average of 7.6 percent of GDP. For the remainder of the 
simulation period, levels of revenues and discretionary spending as 
shares of GDP are held constant, and for Social Security and Medicare, 
we use the Trustees' April 2007 intermediate estimates. The Medicare 
estimates assume the continuation of current law, under which fees for 
physicians treating Medicare patients would be cut in future 
years.[Footnote 3] 

Under the alternative scenario in the first 10 years we assume that all 
expiring tax provisions are extended, and the 2007 exemption amount for 
the AMT is continued but not indexed for inflation. After the first 10 
years we bring revenues to their historical share of the economy--18.3 
percent--plus expected revenues from deferred taxes (i.e., taxes on 
withdrawals from retirement accounts). Discretionary spending grows 
with the economy throughout the simulation period--it remains at 7.7 
percent of GDP. This means that over the long term discretionary 
spending is nearly at its 20-year historical average. In addition, the 
alternative scenario uses Medicare estimates developed by CMS that 
assume payment rates to physicians will not be reduced as specified 
under current law and assumed by the Trustees in their intermediate 
projections[Footnote 4]. As in baseline extended, the alternative 
scenario uses the Trustees' intermediate estimates for Social Security 
after the first 10 years. 

Both these figures show that waiting makes the size of the problem 
worse. For example, even under our more optimistic baseline extended 
scenario, waiting until 2040 to balance the budget would require 
drastic change. To balance the budget in that year, federal revenue as 
a share of GDP would have to increase by one-third or noninterest 
federal spending would have to be cut by almost 30 percent. If changes 
in federal individual income taxes were the sole means used to balance 
the budget, these would have to increase by more than 60 percent in 
that year assuming no changes to the composition of revenues after 
2018. Sudden, drastic changes of either kind--and revenues at such a 
level--have not been seen in this country since the end of World War 
II. 

The Fiscal Gap--Another Way to Measure the Challenge: 

There are many ways to measure the long-term fiscal challenge. One 
quantitative measure is called the fiscal gap. The fiscal gap is the 
amount of spending reduction or tax increases that would be needed to 
keep debt as a share of GDP at or below today's ratio. In contrast to 
balancing the budget in a particular year, such as in 2040 as described 
above, the fiscal gap is an estimate of the action needed to achieve 
fiscal balance over a certain time period such as 75 years. Another way 
to say this is that the fiscal gap is the amount of change needed to 
prevent the kind of debt explosion implicit in figure 1. The fiscal gap 
can be expressed as a share of the economy or in present value dollars. 
(See table 1.) 

Table 1: Federal Fiscal Gap 2008-2082: 

Baseline: 
Fiscal gap, Trillions of 2008 dollars: 25.6; 
Fiscal gap, Share of GDP: 3.2; 
Change required to close gap compared to today's levels, Percentage 
increase in revenue: 17.3; 
Change required to close gap compared to today's levels, Percentage 
increase in individual income taxes: 38.1; 
Change required to close gap compared to today's levels, Percentage 
decrease in noninterest spending: 17.4. 

Alternative: 
Fiscal gap, Trillions of 2008 dollars: 55.3; 
Fiscal gap, Share of GDP: 7.0; 
Change required to close gap compared to today's levels, Percentage 
increase in revenue: 37.7; 
Change required to close gap compared to today's levels, Percentage 
increase in individual income taxes: 82.5; 
Change required to close gap compared to today's levels, Percentage 
decrease in noninterest spending: 37.3. 

Source: GAO analysis. 

[End of table] 

To put this in perspective, the fiscal gap under baseline extended 
could be closed by an increase in today's revenue of about 17 percent 
or an equivalent reduction in today's programmatic spending and 
maintained over the entire period. Under our alternative simulation, 
the required action would be even more dramatic--about 37 percent of 
today's taxes or spending. Policymakers could phase in the policy 
changes so that the tax increases or spending cuts would grow over time 
and allow people to adjust. However, delaying action would require 
larger changes. Under our alternative simulation, waiting even 10 years 
would require a revenue increase of about 48 percent or noninterest 
spending cuts of about 42 percent. 

This gap is too large to simply grow out of the problem. To be sure, 
additional economic growth would help the nation's financial condition 
and the ability to address the fiscal gap, but it will not eliminate 
the need for action. 

State and Local Governments Face Similar Long-Term Fiscal Challenges: 

In 2007 we expanded our work on the long-term fiscal outlook to develop 
a model of the state and local government sector.[Footnote 5] Figure 4 
presents the results of our simulations that combine the federal 
government's fiscal outlook with that of the state and local government 
sector. The simulations imply that the aggregate fiscal outcome of the 
state and local government sector will add to the nation's fiscal 
difficulties and suggest that these fiscal challenges cannot be 
remedied simply by shifting the burden from one sector to another. 

Figure 4: Federal and Combined Federal, State, and Local Surpluses and 
Deficits as a Share of GDP: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 2000; 
Federal surplus/deficit, percent of GDP: 2.4; 
Combined surplus/deficit, percent of GDP: 2.1; 

Fiscal year: 2001; 
Federal surplus/deficit, percent of GDP: 1.3; 
Combined surplus/deficit, percent of GDP: 0.5. 

Fiscal year: 2002; 
Federal surplus/deficit, percent of GDP: -1.5; 
Combined surplus/deficit, percent of GDP: -2.7. 

Fiscal year: 2003; 
Federal surplus/deficit, percent of GDP: -3.5; 
Combined surplus/deficit, percent of GDP: -4.5. 

Fiscal year: 2004; 
Federal surplus/deficit, percent of GDP: -3.6; 
Combined surplus/deficit, percent of GDP: -4.4. 

Fiscal year: 2005; 
Federal surplus/deficit, percent of GDP: -2.6; 
Combined surplus/deficit, percent of GDP: -3.2. 

Fiscal year: 2006; 
Federal surplus/deficit, percent of GDP: -1.9; 
Combined surplus/deficit, percent of GDP: -2.5. 

Fiscal year: 2007; 
Federal surplus/deficit, percent of GDP: -1.2; 
Combined surplus/deficit, percent of GDP: -1.8. 

Fiscal year: 2008; 
Federal surplus/deficit, percent of GDP: -1.8; 
Combined surplus/deficit, percent of GDP: -2.6. 

Fiscal year: 2009; 
Federal surplus/deficit, percent of GDP: -2.2; 
Combined surplus/deficit, percent of GDP: -2.9. 

Fiscal year: 2010; 
Federal surplus/deficit, percent of GDP: -2.8; 
Combined surplus/deficit, percent of GDP: -3.5. 

Fiscal year: 2011; 
Federal surplus/deficit, percent of GDP: -3.2; 
Combined surplus/deficit, percent of GDP: -3.8. 

Fiscal year: 2012; 
Federal surplus/deficit, percent of GDP: -3.1; 
Combined surplus/deficit, percent of GDP: -3.6. 

Fiscal year: 2013; 
Federal surplus/deficit, percent of GDP: -3.7; 
Combined surplus/deficit, percent of GDP: -4.3. 

Fiscal year: 2014; 
Federal surplus/deficit, percent of GDP: -3.8; 
Combined surplus/deficit, percent of GDP: -4.4. 

Fiscal year: 2015; 
Federal surplus/deficit, percent of GDP: -4.2; 
Combined surplus/deficit, percent of GDP: -4.8. 

Fiscal year: 2016; 
Federal surplus/deficit, percent of GDP: -4.6; 
Combined surplus/deficit, percent of GDP: -5.3. 

Fiscal year: 2017; 
Federal surplus/deficit, percent of GDP: -4.8; 
Combined surplus/deficit, percent of GDP: -5.4. 

Fiscal year: 2018; 
Federal surplus/deficit, percent of GDP: -5.2; 
Combined surplus/deficit, percent of GDP: -5.7. 

Fiscal year: 2019; 
Federal surplus/deficit, percent of GDP: -5.3; 
Combined surplus/deficit, percent of GDP: -5.9; 

Fiscal year: 2020; 
Federal surplus/deficit, percent of GDP: -5.5; 
Combined surplus/deficit, percent of GDP: -6.1. 

Fiscal year: 2021; 
Federal surplus/deficit, percent of GDP: -5.9; 
Combined surplus/deficit, percent of GDP: -6.5. 

Fiscal year: 2022; 
Federal surplus/deficit, percent of GDP: -6.4; 
Combined surplus/deficit, percent of GDP: -7. 

Fiscal year: 2023; 
Federal surplus/deficit, percent of GDP: -7; 
Combined surplus/deficit, percent of GDP: -7.6; 

Fiscal year: 2024; 
Federal surplus/deficit, percent of GDP: -7.5; 
Combined surplus/deficit, percent of GDP: -8.2. 

Fiscal year: 2025; 
Federal surplus/deficit, percent of GDP: -8.1; 
Combined surplus/deficit, percent of GDP: -8.8. 

Fiscal year: 2026; 
Federal surplus/deficit, percent of GDP: -8.7; 
Combined surplus/deficit, percent of GDP: -9.4. 

Fiscal year: 2027; 
Federal surplus/deficit, percent of GDP: -9.2; 
Combined surplus/deficit, percent of GDP: -10. 

Fiscal year: 2028; 
Federal surplus/deficit, percent of GDP: -9.9; 
Combined surplus/deficit, percent of GDP: -10.7. 

Fiscal year: 2029; 
Federal surplus/deficit, percent of GDP: -10.4; 
Combined surplus/deficit, percent of GDP: -11.3. 

Fiscal year: 2030; 
Federal surplus/deficit, percent of GDP: -11; 
Combined surplus/deficit, percent of GDP: -11.9; 

Fiscal year: 2031; 
Federal surplus/deficit, percent of GDP: -11.6; 
Combined surplus/deficit, percent of GDP: -12.6. 

Fiscal year: 2032; 
Federal surplus/deficit, percent of GDP: -12.2; 
Combined surplus/deficit, percent of GDP: -13.2. 

Fiscal year: 2033; 
Federal surplus/deficit, percent of GDP: -12.9; 
Combined surplus/deficit, percent of GDP: -14. 

Fiscal year: 2034; 
Federal surplus/deficit, percent of GDP: -13.4; 
Combined surplus/deficit, percent of GDP: -14.6. 

Fiscal year: 2035; 
Federal surplus/deficit, percent of GDP: -13.9; 
Combined surplus/deficit, percent of GDP: -15.2. 

Fiscal year: 2036; 
Federal surplus/deficit, percent of GDP: -14.6; 
Combined surplus/deficit, percent of GDP: -15.9. 

Fiscal year: 2037; 
Federal surplus/deficit, percent of GDP: -15.2; 
Combined surplus/deficit, percent of GDP: -16.5. 

Fiscal year: 2038; 
Federal surplus/deficit, percent of GDP: -15.9; 
Combined surplus/deficit, percent of GDP: -17.3. 

Fiscal year: 2039; 
Federal surplus/deficit, percent of GDP: -16.4; 
Combined surplus/deficit, percent of GDP: -17.9. 

Fiscal year: 2040; 
Federal surplus/deficit, percent of GDP: -17; 
Combined surplus/deficit, percent of GDP: -18.5. 

Fiscal year: 2041; 
Federal surplus/deficit, percent of GDP: -17.7; 
Combined surplus/deficit, percent of GDP: -19.2. 

Fiscal year: 2042; 
Federal surplus/deficit, percent of GDP: -18.3; 
Combined surplus/deficit, percent of GDP: -19.9. 

Fiscal year: 2043; 
Federal surplus/deficit, percent of GDP: -18.9; 
Combined surplus/deficit, percent of GDP: -20.5. 

Fiscal year: 2044; 
Federal surplus/deficit, percent of GDP: -19.6. 

Fiscal year: 2045; 
Federal surplus/deficit, percent of GDP: -20.2. 

Fiscal year: 2046; 
Federal surplus/deficit, percent of GDP: -20.8. 

Source: GAO's January 2008 analysis. 	 

[End of figure] 

Rapidly rising health care costs are not simply a federal budget 
problem; they are our nation's number one fiscal challenge. 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. As we have noted 
elsewhere, the expected continued rise in health care costs poses a 
fiscal challenge not just to government budgets, but to American 
business and society as a whole.[Footnote 6] In short, the fundamental 
fiscal problems facing all levels of government are similar and are 
linked. As such, solutions to address these challenges should be 
considered in tandem. 

Key Assumptions in GAO's Federal Simulations: 

We run two simulations that illustrate a range of possible outcomes 
based on different policy decisions on the long-term budget outlook. 
The first, baseline extended, is more optimistic and follows CBO's 
January baseline estimates over the next 10 years; beyond the 10-year 
projection period, revenue and spending on programs other than large 
entitlements are held constant as a share of GDP.[Footnote 7] CBO's 
baseline is not a forecast of future outcomes; rather, it is based on 
the assumption that current laws and policies remain the same.[Footnote 
8] As such, we change some assumptions in our alternative simulation to 
reflect historical trends and recent policy preferences. Table 2 lists 
the key assumptions incorporated in the baseline extended and 
alternative simulations. 

Table 2: Assumptions for Baseline Extended and Alternative Simulations: 

Model inputs: Revenue; 
Baseline extended: CBO's January 2008 baseline through 2018; thereafter 
remains constant at 20.3 percent of GDP (CBO's projection in 2018); 
Alternative: All expiring tax provisions are extended through 2018; 
thereafter equal to 40-year historical average of 18.3 percent of GDP 
plus CBO's estimate of revenue from tax-deferred retirement plans. 

Model inputs: Social Security spending; 
Baseline extended: CBO's January 2008 baseline through 2018; thereafter 
based on 2007 Social Security Trustees' intermediate projections; 
Alternative: Same as Baseline Extended. 

Model inputs: Medicare spending; 
Baseline extended: CBO's January 2008 baseline through 2018; thereafter 
2007 Medicare Trustees' intermediate projections prepared by CMS that 
assume per enrollee Medicare spending grows on average 1 percent faster 
than GDP per capita over the long term; 
Alternative: CMS's intermediate projections adjusted for alternative 
assumption of 0 percent physician payment updates in the first 10 
years. 

Model inputs: Medicaid spending; 
Baseline extended: CBO's January 2008 baseline through 2018; thereafter 
CBO's December 2007 long-term projections adjusted to reflect excess 
cost growth consistent with the 2007 Medicare Trustees' intermediate 
projections; 
Alternative: Same as Baseline Extended. 

Model inputs: Other mandatory spending; 
Baseline extended: CBO's January 2008 baseline through 2018; 
thereafter remains constant as a share of GDP at 1.9 percent (i.e., 
increases at the rate of economic growth); 
Alternative: Baseline extended through 2011, then adjusted for 
extension of certain tax credits through 2018; thereafter remains 
constant as a share of GDP at 2.0 percent. 

Model inputs: Discretionary spending; 
Baseline extended: CBO's January 2008 baseline through 2018; 
thereafter remains constant at 6.1 percent of GDP; 
Alternative: Increases at the rate of economic growth starting after 
2008 (i.e., remains constant at 7.7 percent of GDP). 

Source: GAO. 

[End of table] 

One assumption we change in our alternative simulation is discretionary 
spending. CBO's projections of discretionary spending for fiscal years 
2009 through 2018 are based on fiscal year 2008 funding enacted to 
date, including any supplemental appropriations. CBO assumes 
discretionary spending grows over the next 10 years at the rate of 
inflation. As such, the use of supplemental appropriations and their 
timing can cause sharp swings in discretionary outlay projections. 

For example, as of January 2008, $88 billion had been appropriated for 
operations in Iraq and the Global War on Terror (GWOT) for fiscal year 
2008. In contrast, the baseline underlying our August 2007 simulations 
reflected supplemental appropriations passed for fiscal year 2007 for 
Iraq and GWOT that totaled $170 billion. As a result, both the jump off 
point for CBO's 10-year discretionary spending estimates and our long-
term assumption for discretionary spending in our baseline extended 
simulation is lower. Specifically, compared to our August 2007 baseline 
extended simulation, discretionary spending in this update is lower by 
about 0.3 percent of GDP over the long term. However, this change may 
only be temporary; the administration has requested another $105 
billion in supplemental funding this fiscal year, which will lead to 
higher discretionary spending projections in CBO's August 2008 baseline 
(and subsequently our simulations). Despite these swings in 
discretionary spending, our simulations continually show that the 
nation is on an unsustainable fiscal path. 

A more detailed description of the federal model and key assumptions 
can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/simulations.html]. Details on 
the state and local fiscal model can be found in appendix I of State 
and Local Governments: Growing Fiscal Challenges Will Emerge during the 
Next 10 Years.[Footnote 9] 

Changes to the Federal Model in This Update: 

Previously, our federal budget simulations incorporated the negative 
effect on economic growth of large deficits that divert funds from 
private investment. This relationship between deficits and economic 
growth, or feedback, has been removed for this update in part to make 
the results of our federal model consistent with the results from our 
state and local model. As a result of this change, GDP grows steadily 
and our simulation results can be displayed over a longer period. 
Updated results of our simulations using our old methodology, which 
includes feedback, are shown in appendix I. The bottom line is that 
with or without feedback, our simulations imply that the nation's 
current fiscal policy is unsustainable over the long term. 

For this update, we also incorporated CBO's most recent long-term 
projections for Medicaid spending that were released in December 2007. 
We adjust CBO's Medicaid path to make the excess cost growth 
assumptions consistent with the Trustees assumption. 

We conducted this performance audit from January 2008 to March 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

This product is based on our work on the long-term fiscal challenge, 
including reports and testimonies. Related products can be found at 
[hyperlink, 
http://www.gao.gov/special.pubs/longterm/longtermproducts.html]. 

End of section] 

Appendix I: GAOï¿½s Long-Term Simulations with Economic Feedback: 

Figure 5: Potential Fiscal Outcomes under Baseline Extended with 
Economic Feedback: Revenues and Composition of Spending as Shares of 
GDP: 

[See PDF for image] 

This figure is a combination line and stacked vertical bar graph, 
depicting the following data: 

Fiscal year: 2007; 
Revenue, percent of GDP: 18.8; 
Net interest, percent of GDP: 1.7; 
Social Security, percent of GDP: 4.3; 
Medicare and Medicaid, percent of GDP: 4.1; 
All other spending, percent of GDP: 9.9. 

Fiscal year: 2018; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 1.2; 
Social Security, percent of GDP: 4.9; 
Medicare and Medicaid, percent of GDP: 5.3; 
All other spending, percent of GDP: 8. 

Fiscal year: 2030; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 1.2; 
Social Security, percent of GDP: 6.4; 
Medicare and Medicaid, percent of GDP: 7.9; 
All other spending, percent of GDP: 8. 

Fiscal year: 2040; 
Revenue, percent of GDP: 20.3; 
Net interest, percent of GDP: 3; 
Social Security, percent of GDP: 6.8; 
Medicare and Medicaid, percent of GDP: 9.6; 
All other spending, percent of GDP: 8. 

Source: GAO's January 2008 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
gross domestic product (GDP) increases through 2018 mainly because of 
(1) real bracket creep, (2) more taxpayers becoming subject to the 
alternative minimum tax (AMT), and (3) increased revenue from tax-
deferred retirement accounts. After 2018, 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. 

[End of figure] 

Figure 6: Potential Fiscal Outcomes under Alternative Simulation with 
Economic Feedback: Revenues and Composition of Spending as Shares of 
GDP: 

[See PDF for image] 

This figure is a combination line and stacked vertical bar graph, 
depicting the following data: 

Fiscal year: 2007; 
Revenue, percent of GDP: 18.8; 
Net interest, percent of GDP: 1.7; 
Social Security, percent of GDP: 4.3; 
Medicare and Medicaid, percent of GDP: 4.1; 
All other spending, percent of GDP: 9.9. 

Fiscal year: 2018; 
Revenue, percent of GDP: 17.9; 
Net interest, percent of GDP: 2.6; 
Social Security, percent of GDP: 4.9; 
Medicare and Medicaid, percent of GDP: 5.9; 
All other spending, percent of GDP: 9.7. 

Fiscal year: 2030; 
Revenue, percent of GDP: 18.6; 
Net interest, percent of GDP: 5.6; 
Social Security, percent of GDP: 6.6; 
Medicare and Medicaid, percent of GDP: 8.3; 
All other spending, percent of GDP: 9.7. 

Fiscal year: 2040; 
Revenue, percent of GDP: 18.6; 
Net interest, percent of GDP: 10.8; 
Social Security, percent of GDP: 7.2; 
Medicare and Medicaid, percent of GDP: 10.1; 
All other spending, percent of GDP: 9.7. 

Source: GAO's January 2008 analysis. 

Notes: Discretionary spending grows with GDP after 2008. The AMT 
exemption amount is retained at the 2007 level through 2018 and 
expiring tax provisions are extended. After 2018, revenue as a share of 
GDP returns to its historical level of 18.3 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. 

[End of figure] 

[End of section] 

Footnotes: 

[1] Under the sustainable growth rate system in current law, physician 
payments are scheduled to be reduced by 10 percent in 2008 and 5 
percent in each subsequent year through 2016. 

[2] Discretionary spending refers to spending based on authority 
provided in annual appropriations acts. Mandatory spending refers to 
spending that Congress has authorized in legislation other than 
appropriations acts that entitles beneficiaries to receive payment or 
that otherwise obligates the government to make payment. 

[3] The Trustees noted in their April 2007 report that Medicare 
expenditures "are substantially understated because projected current-
law physician payment updates are unrealistically reduced under the 
sustainable growth rate system (the statutory formula that governs fee 
updates) by about 10 percent in 2008 and 5 percent in each subsequent 
year through 2016. In practice, Congress is virtually certain to 
prevent some or all of the scheduled reductions through new 
legislation, as it has for 2003 through 2007." In addition, CMS assumes 
excess medical cost growth on average of 1 percent over the long term, 
which is lower than the historical average of 2.5 percent. Together 
these differences result in lower Medicare spending than CBO's long-
term projections. See Congressional Budget Office, The Long-Term 
Outlook for Health Care Spending (Nov. 2007). 

[4] This reflects the fact that Congress has generally acted to prevent 
payment rates from being reduced. CMS developed two illustrative 
Medicare estimates that vary from the intermediate estimates. One set 
of estimates assumes a 0 percent update to physician fees; the other 
assumes updates for medical inflation. GAO's alternative simulation 
uses the 0-percent update estimates. For more information on these 
estimates, see CMS's April 2007 memorandum "Projected Medicare Part B 
Expenditures under Two Illustrative Scenarios with Alternative 
Physician Payment Updates," available at [hyperlink, 
http://www.cms.hhs.gov/ReportsTrustFunds/05_alternativePartB.asp]. 

[5] GAO, State and Local Governments: Growing Fiscal Challenges Will 
Emerge during the Next 10 Years GAO-08-317 (Washington, D.C.: Jan. 
2008) and State and Local Governments: Persistent Fiscal Challenges 
Will Likely Emerge within the Next Decade GAO-07-1080SP (Washington, 
D.C.: July 18, 2007). 

[6] For example, see GAO, Highlights of a Forum: Health Care 20 Years 
From Now--Taking Steps Today to Meet Tomorrow's Challenges GAO-07-
1155SP (Washington, D.C.: Sept. 2007). 

[7] The CBO report can be accessed at [hyperlink, http://www.cbo.gov]. 

[8] The Balanced Budget and Emergency Deficit Control Act of 1985, 
which established rules that govern the calculation of CBO's baseline, 
expired on September 30, 2006. CBO continues to prepare baselines 
according to the methodology prescribed in that law. 

[9] GAO-08-317. 

[End of section] 

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