This is the accessible text file for GAO report number GAO-04-585T 
entitled 'Budget Process: Long-term Focus Is Critical' which was 
released on March 23, 2004.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

Testimony:

Before the Subcommittee on Legislative and Budget Process, Committee on 
Rules, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 11:00 a.m. EST:

Tuesday, March 23, 2004:

Budget Process:

Long-term Focus Is Critical:

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

GAO-04-585T:

GAO Highlights:

Highlights of GAO-04-585T, a testimony before the Subcommittee on 
Legislative and Budget Process, Committee on Rules, House of 
Representatives 

Why GAO Did This Study:

The structure of the budget process can help ensure that budget 
decision makers are presented with the information and choices for 
timely and informed decision-making. GAOs long-term budget simulations 
show that, absent substantive entitlement reform and/or dramatic 
changes in tax and spending policies, we will face large, escalating, 
and persistent deficits. A budget process incorporating new metrics and 
mechanisms that better signal the long-term commitments and promises 
made by the government will help concentrate decision makers efforts 
on long-term sustainability.

What GAO Found:

The long-term fiscal pressures created by the impending retirement of 
the baby boom generation sharpen the need to look at competing claims 
on existing federal budgetary resources and emerging new priorities. 
Truth and transparency in government reporting are essential if the 
United States is to effectively address these long-term fiscal 
challenges. Current metrics and mechanisms do not fully inform policy 
makers about the sustainability of existing federal programs or 
commitments they are considering making. While Social Security and 
health programs are the major drivers of the long-term spending 
outlook, they are not the only promises the federal government has made 
to the future. The government undertakes a wide range of 
responsibilities, programs, and activities that may either obligate the 
government to future spending or create an expectation for such 
spending. It is useful to think of such fiscal exposures as a spectrum 
extending from explicit liabilities to the implicit promises embedded 
in current policy and/or public expectations.

What GAO Recommends:

The reinstitution of realistic spending caps and PAYGO is necessary to 
deal with the near- and medium-term deficit. Beyond that, a fundamental
reexamination of existing programs and activities must be undertaken. 
To enable budget decision makers to consider the full range of the 
governments commitments, OMB should report annually on fiscal 
exposures, including a concise list and cost estimates, where possible. 
To address the nations fiscal imbalance, we need to employ a three-
pronged approach to (1) restructure existing entitlement programs, (2) 
reexamine the base of discretionary and other spending, and (3) review 
and revise the federal governments tax policy and enforcement 
programs.

www.gao.gov/cgi-bin/getrpt?GAO-04-585T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Susan J. Irving at (202) 
512-9142 or irvings@gao.gov.

[End of section]

Madam Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss budget process reform ideas 
that can help the Congress deal with the long-range fiscal challenges 
facing our nation. I want to thank the Subcommittee for its role in 
beginning the discussion and debate on what the nation needs to do to 
address our large and growing fiscal challenges. As part of that 
discussion, today we are focused on how best to structure a budget 
process to help ensure that decision makers are presented with the 
information and choices for timely and informed decision-making. While 
former Congressional Budget Office (CBO) Director Rudy Penner was 
correct when he said, "The problem is not the process, the problem is 
the problem," process is important. A lack of process and discipline 
can certainly work against attempts to make the difficult decisions 
that will be required to address our large and growing fiscal 
imbalance. And, a process that illuminates the looming fiscal pressures 
and provides appropriate incentives can at least help decision makers 
focus on the right questions.

As you look at the challenge of updating the budget process, you face a 
two-pronged challenge: first, the need to reinstitute controls to deal 
with the near-and medium-term deficit; and second, the need to design a 
process that helps the Congress tackle the formidable long-term fiscal 
challenges facing this nation. With regard to deficit reduction in the 
near-and medium term, changes on both sides of the ledger affect the 
bottom line. I endorse what many budget experts have suggested here and 
elsewhere--namely, the restoration of realistic caps and of pay-as-you-
go (PAYGO) discipline. Today, however, I want to focus more on the role 
the budget process can play in dealing with the longer-term budget and 
fiscal challenges facing this nation. Indeed, since at its heart the 
budget debate is about the allocation of limited resources, it is 
understandable and appropriate for the budget process to play a key 
role in helping to address our broader challenge of modernizing 
government for the 21st century.

The Long-term Budget Challenge:

The long-term fiscal pressures created by the impending retirement of 
the baby boom generation, rising health care costs and increased 
homeland security and defense commitments sharpen the need to look at 
competing claims on existing federal budgetary resources and emerging 
new priorities. As we look ahead, our nation faces an unprecedented 
demographic challenge. Between now and 2035, the number of people who 
are 65 years old or over is expected to double, driving federal 
spending on the elderly to a larger and ultimately unsustainable share 
of the federal budget. Absent substantive entitlement reform and/or 
dramatic changes in tax and spending policies, we will face large, 
escalating, and persistent deficits.

For over ten years, the GAO has periodically prepared various long-term 
budget simulations that seek to illustrate the likely fiscal 
consequences of our coming demographic challenges and rising health 
care costs. Our latest long-term budget simulations reinforce the need 
for change in the major long-range cost drivers--Social Security and 
health care programs. As shown in figure 1, by 2040, assuming no 
changes to currently projected benefits or revenues, projected federal 
revenues may be adequate to pay little beyond interest on the debt.

Figure 1: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2004 and All Expiring Tax 
Provisions Are Extended:

[See PDF for image]

Notes: Although expiring tax provisions are extended, revenue as a 
share of GDP increases through 2014 due to (1) real bracket creep, (2) 
more taxpayers becoming subject to the AMT, and (3) increased revenue 
from tax-deferred retirement accounts. After 2014, revenue as a share 
of GDP is held constant.

[End of figure]

Reducing the relative future burdens of Social Security and federal 
health programs is critical to promoting a sustainable budget policy 
over the longer term. Absent reform, the impact of federal health and 
retirement programs on budget choices will be increasingly felt as the 
baby boom generation retires. While much of the public debate 
concerning the Social Security and Medicare programs focuses on trust 
fund balances--that is, on the programs' solvency--the larger challenge 
facing these programs is how to assure their longer-term security and 
sustainability.

The Social Security and Medicare Health Insurance (HI) programs are 
currently running surpluses that are invested in U.S. Treasury 
securities, resulting in an accumulated balance of Treasury assets that 
can be drawn upon to pay future benefits. According to the 2003 
Trustees' projections, these trust funds would be considered insolvent 
in 2042[Footnote 1] for Social Security and in 2026 for Medicare HI.

The information on insolvency provides one signal to policy makers that 
claims will exceed trust fund balances, but this measure alone can 
provide a false sense of security regarding these important federal 
programs. If we rely solely on trust fund insolvency to trigger actions 
to reform these programs, we will have delayed action far past the 
point when these two programs have become a significant and 
unsustainable fiscal burden on the federal government as a whole. Based 
on the 2003 Trustees Reports, the cash flows for Social Security will 
shift to a deficit in 2018 and for Medicare HI in 2013--at these 
points, both programs will then have to draw on their accumulated IOUs 
from the Treasury to pay a portion of benefits. The only way that 
Treasury can pay off these IOUs is by increased taxes, spending cuts, 
or increased borrowing from the public, or some combination of the 
three. Moreover, the trust funds' balances do not reflect the full 
future cost of existing government commitments. In addition, the HI 
trust fund reflects only a portion of the Medicare program, which is 
financed primarily through payroll taxes. Other parts of the Medicare 
program include the Part B Supplementary Medical Insurance component 
and the new Part D drug benefit, both of which are financed through 
general revenues and beneficiary premiums. Taken as a whole, the 
Medicare program is fiscally unsustainable in its present form as 
program expenditures are expected to exceed program revenues 
dramatically in the future. From a macro perspective the critical 
question is not how much a trust fund has in assets, but whether the 
government as a whole has the economic capacity to finance the benefits 
promised by these programs both now and in the future and, if so, at 
what cost, and with what implications.

As a result, we need to incorporate new metrics and mechanisms into the 
budget process that better signal the long-term commitments and 
implicit promises made by the government--its fiscal exposures--so that 
decision makers' attention and efforts can be more concentrated on 
their long-term sustainability. The difficulty of developing meaningful 
measures of sustainability is exacerbated by the length of time covered 
by our long-term commitments. The longer the span of time between the 
collection and the expenditure of funds, the greater the uncertainty 
involved in forecasting future needs. Since trust fund balances do not 
fully inform policymakers and the public about the long-term 
sustainability of the programs financed by earmarked funds, 
consideration is warranted of other ways to make the long-term 
implications of spending and tax proposals and policies more apparent 
when making budget decisions. The future sustainability of programs is 
the key issue policymakers should address--that is, the capacity of the 
economy and budget to afford the proposed actions.

Fiscal Exposures Are Wide-ranging and Varied:

While Social Security, Medicare, and Medicaid are the major drivers of 
the long-term spending outlook in the aggregate, they are not the only 
promises the federal government has made to the future.[Footnote 2] The 
federal government undertakes a wide range of responsibilities, 
programs, and activities that may either obligate the government to 
future spending or create an expectation for such spending. Specific 
fiscal exposures vary widely as to source, likelihood of occurrence, 
magnitude, and strength of the government's legal obligations. They may 
be explicit or implicit; they may currently exist or be contingent on 
future events. Their ultimate costs may or may not be reasonably 
measurable. Given this breadth, it is useful to think of fiscal 
exposures as a spectrum extending from explicit liabilities to the 
implicit promises embedded in current policy and/or public 
expectations. Figure 2 shows some selected fiscal exposures. These 
liabilities, commitments, and implicit exposures have created a fiscal 
imbalance that will put unprecedented strains on the nation's spending 
and tax policies. In addition, certain tax expenditures[Footnote 3] may 
have uncertain or accelerating future growth paths that have 
significant implications for the long term. Although economic growth 
can help, our projected fiscal gap is now so large that we will not be 
able to simply grow our way out of the problem. Tough choices are 
inevitable.

Figure 2: Selected Fiscal Exposures (End of FY 2003):

[See PDF for image]

Note: Updated February 27, 2004.

[A] This amount includes $774 billion in securities held by military 
and civilian pension funds that would offset the explicit liabilities 
reported by those funds.

[B] Figures for Social Security and Medicare are as of January 1, 2003, 
and are estimated over a 75-year period. These amounts represent net 
present value and are net of debt held by the trust funds ($1,378 
billion for Social Security, $235 billion for Medicare Part A, and $34 
billion for Medicare Part B). The estimate for Social Security over an 
infinite horizon would be $10.5 trillion according to the Social 
Security Trustees' 2003 annual report. There is no infinite horizon 
estimate for Medicare included in the Medicare Trustees' 2003 annual 
report. Medicare Part D was enacted after the end of FY 2003.

[End of figure]

Particularly troubling are the many existing "big-ticket" items that 
taxpayers will eventually have to deal with. The federal government has 
pledged its support to a long list of programs and activities, 
including pension and health care benefits for senior citizens, 
veterans' medical care, and, implicitly, various government-sponsored 
entities, whose potential claims on future spending total tens of 
trillions of dollars. Despite their serious implications for future 
budgets, tax burdens, and spending flexibilities, these fiscal 
exposures often get short shrift in reporting on the government's 
current financial condition and in budgetary deliberations. Even though 
some fiscal exposures stem from liabilities and are reported in the 
financial statements, their recognition in the current cash-and 
obligation-based budget process is wholly inadequate. And beyond 
explicit liabilities and contingencies, there are implicit exposures--
implied commitments embedded in the government's current policies or in 
the public's expectations about the role of government--that may 
encumber future budgets or reduce fiscal flexibility. One example is 
the life cycle cost of fixed assets, including deferred and future 
maintenance and operating costs.

An exposure recognized in the financial statements is the federal 
government's gross debt which, as of September 2003, was about $7 
trillion, or about $24,000 for every man, woman, and child in this 
country today. But that number excludes items such as the gap between 
promised and funded Social Security and Medicare commitments. If these 
items are factored in, the burden for every American rises to well over 
$100,000. In addition, the new Medicare prescription drug benefit will 
add thousands more to that tab.

The new drug benefit is one of the largest unfunded commitments ever 
undertaken by the federal government. The Trustees of the Social 
Security and Medicare trust funds will include an official estimate of 
the discounted present value cost of this new benefit over the next 75 
years in their annual report, which is scheduled for issuance today. 
Preliminary estimates of its long-term cost range up to $7-8 trillion 
in discounted present value terms over a 75-year period. To put that 
number in perspective, it is as much or more than the total amount of 
the federal government's gross debt outstanding as of September 30, 
2003. Even before the drug benefit was enacted, our long-term 
simulations showed that by 2040, the federal government may have to cut 
federal spending in half or double taxes to pay for the mounting cost 
of the government's unfunded commitments. Either would have devastating 
consequences on the nation's future economy and the quality of life for 
Americans in the future.

Where Do We Go from Here?

Truth and transparency in government reporting are essential if the 
United States is to effectively address its long-term fiscal 
challenges. The fiscal exposures just mentioned can be managed only if 
they are properly accounted for and publicly disclosed. A crucial first 
step will be to face facts and identify the many significant 
commitments already facing the federal government. If citizens and 
government officials come to understand various fiscal exposures and 
their potential claims on future budgets, they are more likely to 
insist on prudent policy choices today and sensible levels of fiscal 
risk in the future.

So how do we start this hard process? Today you are focusing on budget 
process improvements, so I will start there. We need a process that 
does two things better than the processes we have used in the past. The 
budget process needs (1) better transparency and controls about the 
fiscal exposures/commitments that the federal government is considering 
making and (2) better signals and incentives to address the fiscal 
exposures/commitments the federal government has already made. GAO has 
encouraged reforms that would help move forward on both fronts.

Transparency of existing commitments would be improved by requiring 
that the Office of Management and Budget (OMB) report annually on 
fiscal exposures, including a concise list, description, and cost 
estimates, where possible. OMB should also ensure that agencies focus 
on improving cost estimates for fiscal exposures. This should 
complement and support continued and improved reporting of long-range 
projections and analysis of the budget as a whole to assess fiscal 
sustainability and flexibility.

Others have also embraced this idea for better reporting of fiscal 
exposures. Last year Senator Voinovich proposed that the President 
report each January on the fiscal exposures of the federal government 
and their implications for long-term financial health. The President's 
fiscal year 2005 budget proposes that future Presidents' budgets report 
on any enacted legislation in the past year that worsens the unfunded 
obligations of programs with long-term actuarial projections, with CBO 
being required to make a similar report. Senator Voinovich's bill would 
require GAO to review the President's report on fiscal exposures for 
completeness, quality and the long-range fiscal outlook. Senator 
Lieberman has also introduced legislation to require better information 
on liabilities and commitments over both a 75-year and indefinite time 
horizon. Such reporting would be a good starting point. Senator 
Lieberman's bill provides for a point of order against bills that 
adversely affect the net present value of overall liabilities and 
commitments by more that a specified amount.

Better information on existing commitments and promises must be coupled 
with estimates of the long-term discounted net present value cost of 
any new proposed commitments. Ten-year budget projections have been 
available to decision makers for many years. We must build on that 
regime but also incorporate longer-term estimates of net present value 
costs for spending and tax commitments comprising longer-term exposures 
for the federal budget beyond the 10-year window. Better reporting is 
just a starting point, however.

While Social Security and Medicare drive the long-term spending 
outlook, decisions are made about a whole host of other programs with 
long-term implications too small to drive the long-term outlook. A 
budget is all about how to allocate available resources. Budget 
decisions reflect a number of factors including beliefs about the 
appropriate role of government in various areas, judgment about the 
likely success of a program in achieving certain goals, and the cost of 
a program. It is important that Members of the Congress and the 
President--and citizens--be able to compare the full costs of programs 
on a consistent basis. In the past, GAO has suggested that the budget 
numbers should themselves reflect long-term cost commitments for 
programs such as credit, federal pension and retiree health benefits, 
and insurance programs. The Federal Credit Reform Act of 1990 put 
credit programs on a comparable basis with grants and other assistance 
programs. This reform enabled decision makers to budget for credit 
based on the net present value of the federal subsidies over the life 
of the loan or guarantee. We have suggested that a similar treatment be 
applied to insurance programs in which the cost of the program in the 
budget would, in effect, be the missing premium--the subsidy provided 
by the government to the insured. This approach was included in 
legislation sponsored by Congressmen Nussle and Cardin several years 
ago. They recognized, as did GAO, that the budget's current cash 
treatment of insurance programs could misstate the cost of the 
commitments that have been made. Some improvements have been made in 
budgeting for federal pension and retiree health benefits, but they 
have not been applied to all employees.

Along with better reporting, budget process mechanisms could establish 
opportunities for the explicit consideration of important fiscal 
exposures--both new and existing. When considering the creation of new 
exposures, Congress could modify budget rules to provide for a point of 
order against any proposed legislation that creates new spending or tax 
exposures over some specified level or trigger. This would encourage 
the explicit consideration of potential future costs. To make sure the 
cost estimates are made available, rules could also provide for a point 
of order against any proposed legislation that does not include 
estimates of the potential costs of fiscal exposures it would create.

A different budget process approach would be to establish triggers that 
address the growth in existing exposures. Triggers would signal when 
the future costs of exposures rise above a certain level. Reaching the 
trigger would require some action to address costs or reaffirm 
acceptance of the increase in potential fiscal exposure. There are many 
different ways to construct a trigger. Possible triggers include future 
costs of a specific exposure exceeding a specified dollar amount, or 
expected program growth beyond a specified share of the federal budget 
or the gross domestic product. Congress already adopted an approach 
similar to this for the Medicare program last year. Under this process, 
the program as a whole would trigger a requirement for presidential and 
congressional consideration when the general revenue share of Medicare 
funding is projected in two consecutive years to exceed 45 percent 
during a 7-year period. The design of triggers is important and has 
implications for the mix of financing to be provided for covered 
programs. My staff would be happy to work with you if you choose this 
approach.

Looking More Broadly:

We must look through a wide-angle lens when deciding what to do about 
the nation's fiscal imbalance. Based on realistic assumptions, our 
future fiscal gap is simply too great to grow our way out of the 
problem. As a result, we need to employ a three-pronged approach to (1) 
restructure existing entitlement programs, (2) reexamine the base of 
discretionary and other spending, and (3) review and revise the federal 
government's tax policy and enforcement programs. Fundamentally, we 
need to undertake a top-to-bottom review of government activities to 
ensure their relevance and fit for the 21st century and their relative 
priority. The understanding and support of the American people will be 
critical in providing a foundation for action. The fiscal risks I have 
discussed, however, are a long-term problem whose full impact will not 
be felt for some time. At the same time they are very real and time is 
currently working against us.

While I agree with others that realistic spending caps and the 
restoration of PAYGO are necessary, additional actions are needed to 
prompt a reexamination of existing programs and activities. In the 
1990s, the Congress and the Administration put in place a set of laws 
designed to improve information about cost and performance. More 
performance information has become available thanks to 10 years of 
experience under the Government Performance and Results Act (GPRA) and 
better financial and cost information has been produced as a result of 
legislative actions, including the Chief Financial Officers (CFO) Act 
of 1990. This information can clearly help inform the debate about what 
the federal government should do and how it should do business.

Congress now has the challenge to use new information and data to 
engage in a process to systematically reexamine the base of federal 
programs across the entire budget. In previous testimonies and reports, 
we have suggested that Congress might equip itself to engage in this 
debate by (1) establishing a vehicle for communicating performance 
goals and measures for key congressional priorities; (2) developing a 
more structured oversight agenda to permit a more coordinated 
congressional perspective on crosscutting programs and policies; and 
(3) using such an agenda to inform its authorization, oversight and 
appropriations processes. Some have suggested a commission to jump-
start this process while others have suggested periodic sunsetting of 
major programs. We at GAO stand ready to provide assistance to whatever 
process Congress chooses for this important work.

Such a process can be supported by a national education campaign and 
outreach effort to help the public understand the nature and magnitude 
of the long-term financial challenge facing this nation. After all, an 
informed electorate is essential for a sound democracy. Members of 
Generation X and Y especially need to become active in this discussion 
because they and their children will bear the heaviest burden if policy 
makers fail to act in a timely and responsible manner. The difficult 
but necessary choices we face will be facilitated if the public has the 
facts and comes to support serious and sustained action to address the 
nation's fiscal challenges.

In closing, Madam Chairman, I want to reiterate the value of sustained 
congressional interest in these issues, as demonstrated by this 
Subcommittee's hearing.

FOOTNOTES

[1] The year 2042 is when the combined Social Security trust fund--the 
Old Age and Survivors Insurance and Disability Insurance trust funds--
is projected to become insolvent.

[2] While interest is a large and growing share of the budget, it does 
not directly drive the fiscal outlook in that interest is the result of 
other decisions affecting spending and tax policy.

[3] Tax expenditures are revenue losses attributable to a provision of 
the federal tax laws that allows a special exclusion, exemption, or 
deduction from gross income or that provides a special credit, 
preferential tax rate, or deferral of tax liability.