Today’s Fiscal Policy Remains Unsustainable

This is from the United States Government Accountability Office and it is entitled:Â The Nation’s Long-Term Fiscal Outlook September 2006 Update

GAO’s current long-term simulations continue to show ever-larger deficits resulting in a federal debt burden that ultimately spirals out of control. The timing of deficits and the resulting debt build up varies depending on the assumptions used, but under either optimistic (“Baseline extended”) or more realistic assumptions, current fiscal policy is unsustainable.

Simulations are not forecasts or predictions. They are designed to ask the question “what if?” GAO’s “what ifs” are that discretionary spending may grow faster or slower, and tax cuts may be renewed or allowed to expire – but in both cases, the Nation’s long-term fiscal future is “at risk.” Under any reasonable set of expectations about future spending and revenues, the risks posed to the Nation’s future financial condition are too high to be acceptable.

By definition, what is unsustainable will not be sustained. The question is how our current imprudent and unsustainable path will end. At some point, action will be taken to change the Nation’s fiscal course. The sooner appropriate actions are taken, the sooner the miracle of compounding will begin to work for the federal budget rather than against it. Conversely, 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 give us more time to phase in gradual changes, while 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., Social Security, Medicare, Medicaid). The retirement of the baby boom generation is one key element of this. In 2008 the first boomers will be eligible to draw “early retirement” Social Security benefits, and in 2011 the first boomers will become eligible for Medicare. Over the following 2 decades America’s population will age dramatically, and fewer workers will be asked to support ever larger costs for retirees.

Although Social Security is a major part of the fiscal challenge, contrary to popular perception, it is far from our biggest challenge. Spending on the major federal health programs (i.e., Medicare and Medicaid) represents a much larger and faster growing problem. 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. 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 society as a whole.


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