United States Government Accountability Office

GAO The Nation’s Long-Term 

Fiscal Outlook

January 2007 Update

The Bottom Line: Federal Fiscal 

Policy Remains Unsustainable

GAO’s 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. 

GAO developed its long-term 

model in response to a

bipartisan request from 

Members of Congress who were

concerned about the long-term 

effects of fiscal policy. 

In 1992 GAO said: “The federal 

budget is structurally 

unbalanced. This will do

increasing damage to the 

economy and is unsustainable 

in the long term. Regardless of 

the approach chosen, prompt 

and meaningful action is 

essential. The longer it is 

delayed, the more painful it 

will be.” These words are as 

relevant today as when GAO 

first published them. 

GAO updates its simulations 

three times a year as new 

estimates become available 

from: 

• CBO’s Budget and Economic 

Outlook (January), 

• Social Security and Medicare 

Trustees Reports (early spring), 

and 

• CBO’s 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 

http://www.gao.gov/special.pub

s/longterm/. For more 

information, contact Susan J. 

Irving at (202) 512-9142 or 

irvings@gao.gov

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

Policy Simulations 

GAO’s current long-term simulations continue to show ever-larger deficits 

resulting in a federal debt burden that ultimately spirals out of control. 

Figure 1 shows two alternative fiscal paths. As described below “Baseline 

extended” builds on the Congressional Budget Office (CBO) baseline—and 

results over the long term in revenues several points above the 20-year 

historical average and discretionary spending several points below the 20-

year historical average. The modifications in the alternative scenario 

result over the long term in both revenues and discretionary spending 

slightly under the 20-year historical average. Although the timing of 

deficits and the resulting debt build up varies depending on the 

assumptions used, both simulations show that we are on an unsustainable 

fiscal path. 

GAO-07-510R 
Under “Baseline extended” we follow CBO’s baseline for the first 10 years: 

tax provisions that are scheduled to expire are assumed to do so 

(including the temporary increase in the alternative minimum tax (AMT) 

exemption amount) and discretionary spending is assumed to grow with 

inflation. Under the alternative scenario we assume all expiring tax 

provisions are extended, the 2006 exemption amount for the alternative 

minimum tax is continued but not indexed for inflation, and discretionary 

spending grows with the economy. In both simulations, after the first 10 

years (i.e., the end of the projection period) both revenues and 

discretionary spending are held constant as a share of the economy. 

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 

both sets 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 and when our current imprudent and unsustainable path will end. At 

some point, action will be taken to change the Nation’s fiscal course. 

Importantly, 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. 

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 Social Security “early 

retirement” benefits, and in 2011 the first boomers will become eligible for 

Medicare. In the succeeding 2 decades America’s population will age 

dramatically, and relatively fewer workers will be asked to support ever 

larger costs for retirees. 

What Drives Our 

Nation’s Bleak LongTerm Fiscal Outlook? 

Page 2 GAO-07-510R 
Although Social Security is a major part of the fiscal challenge, 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. In fact, the federal government’s obligations for 

Medicare Part D alone exceed the unfunded obligations for Social 

Security. 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. 

Figures 2 and 3 look behind the deficit path to the composition of federal

spending under the two scenarios. 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, our national parks, highways and mass 

transit, foreign aid, plus “mandatory spending” on the smaller entitlement 

programs such as Supplemental Security Income, TANF, and farm price 

supports.1

 The growth in Social Security, Medicare, Medicaid, and interest 

on debt held by the public dwarfs the growth in all other types of 

spending. 

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 over the past 20 or 40 years, as in 

Baseline extended, or somewhat below them as in the alternative 

simulation. 

 1

 “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. 

Page 3 GAO-07-510R 
Figure 2: Potential Fiscal Outcomes Under Baseline Extended 

Revenues and Composition of Spending as a Share of GDP 

Note: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2017

mainly due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3)

increased revenue from tax-deferred retirement accounts. After 2017, 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. 

Page 4 GAO-07-510R 
Figure 3: Potential Fiscal Outcomes Under Alternative Simulation: Discretionary 

Spending Grows with GDP After 2007 and All Expiring Tax Provisions are Extended 

Revenues and Composition of Spending as a Share of GDP

 

Note: AMT exemption amount is retained at the 2006 level through 2017 and expiring tax provisions 

are extended. After 2017, 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. 

 

These figures also show that waiting makes the size of the problem worse. 

For example, even under GAO’s “Baseline extended“ scenario—under 

which revenues rise to about 20 percent of GDP and discretionary 

spending falls to below 6 percent of GDP—waiting until 2040 to close the 

gap would require drastic change. Taxes as a share of GDP would have to 

increase by about 40 percent or total spending cut by almost a third in 

order to balance the budget in that year. Sudden, drastic changes of either 

Page 5 GAO-07-510R 
kind—and revenues at such a level—are outside post-World War II 

historical experience in this country. 

Many ways exist 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 needed to keep debt as a 

share of gross domestic product (GDP) at or below today’s ratio. 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 3. The fiscal gap can

be expressed as a share of the economy or in present value dollars. 

The Fiscal Gap—

Another Way to 

Measure the 

Challenge 

For GAO’s “Baseline extended” simulation, closing the fiscal gap would 

require spending cuts or tax increases equal to 3.6 percent of the entire 

economy each year over the next 75 years, or a total of $26 trillion in 

present value terms. For GAO’s alternative simulation, the gap is 7.5 

percent of the economy, or about $55 trillion in present value terms. To 

put this in perspective, if we were to invest enough today to pay off these 

amounts over the next 75 years, the sums needed would amount to about 

$87,000 to $182,000 per person, or about $208,000 to $435,000 for each fulltime worker. 

Under either set of assumptions, the size of the change we would need to

make in the federal budget would be larger than last year’s unified 

deficit—and that is just the change in the first year of the 75-year window. 

Waiting even 10 years to close the fiscal gap would require larger, more 

drastic changes. For example, under GAO’s Baseline extended simulation 

the fiscal gap would grow from 3.6 percent of the economy today to 4.7 

percent in 2017 simply by waiting to act. 

Additional economic growth is critical and will help to ease the burden, 

but the projected fiscal gap is so great that it is unrealistic to expect we 

will grow our way out of the problem. To do so under any reasonable set 

of assumptions would require double-digit real economic growth for many

decades to eliminate the long-term fiscal challenge. However, since the 

end of World War II we have not seen economic growth of this kind. To be 

sure, additional economic growth would certainly help the Nation’s 

financial condition and our ability to address our fiscal gap, but it will not 

eliminate the need for action. 

Other ways to think about the size of the long-term challenge may also be 

found in http://www.gao.gov/cghome.htm

Page 6 GAO-07-510R 
What Is Assumed in 

GAO’s Simulations? 

GAO’s two simulations project current policies on revenue and spending 

forward. The first is “Baseline extended,” and the second is an alternative 

based on recent trends and policy preferences. They vary in how they deal 

with the first 10 years: 

• Baseline extended. This takes the 10-year baseline estimates2

 of the 

Congressional Budget Office (CBO) and extends them over a 75-

year period. CBO assumes in its baseline estimates that 

discretionary spending grows at the rate of inflation—a slower 

growth rate than that witnessed in many recent years. CBO also 

assumes no changes to today's laws. As CBO recognized in its 

January 2007 Budget and Economic Outlook, this results in some 

very problematic assumptions. For example, since the 

Administration’s request for supplemental appropriations of almost 

$100 billion had not been submitted at the time CBO published its 

Outlook, CBO noted that its January baseline omits some likely 

discretionary spending in 2007 for military operations in Iraq and 

Afghanistan. Another implication of following current law is that 

CBO assumes that all tax cuts originally enacted in 2001 and 2003 

are permitted to expire as currently scheduled, including the 

temporary increase in the AMT exemption amount. 

• Discretionary spending grows with the economy (that is, with 

GDP) and all expiring tax reductions are extended. This 

simulation alters two key assumptions of CBO’s baseline. First, 

discretionary spending is allowed to grow with the economy in the 

first 10 years rather than being constrained to grow with inflation. 

Second, all expiring tax cuts are extended permanently. 

In each simulation, consistent with our practice of many years, at the end 

of the 10-year period we take the levels of revenue and discretionary 

spending as shares of GDP and hold these constant for the rest of the 

simulation period. We have done so in order not to make any long-range

policy assumptions. In addition, after the first 10 years, both simulations 

use the Social Security and Medicare Trustees’ 75-year intermediate 

(“best”) estimates for those programs and assume that promised benefits 

will be paid in full. 

 2

 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. 

Nevertheless, CBO continues to prepare baselines according to the methodology 

prescribed in that law.

Page 7 GAO-07-510R 
What Changed in This 

Update?

Despite improvement in recent years and in near-term projections, the 

long-term outlook has not changed significantly since the last simulations: 

it remains unsustainable. 

As CBO noted, the favorable outlook suggested by its 10-year projections 

does not indicate a substantial change in the nation’s long-term budgetary 

challenges. CBO pointed out that changes in its baseline between August 

and January overstate the fundamental improvement in the underlying 

budget outlook because roughly half of the total change stems from the 

baseline’s treatment of previous supplemental appropriations for disaster 

relief and the irregular pattern of funding for military operations in Iraq 

and Afghanistan. Importantly, one undeniable change from August is that 

we have moved closer to the start of the retirement of the baby boom 

generation and its fiscal consequences. 

 - - - 

GAO’s simulations were updated using CBO’s 10-year baseline budget and 

economic estimates in its January Budget and Economic Outlook: An 

Update. CBO’s report can be found at 

http://www.cbo.gov/showdoc.cfm?index=7731&sequence=0

This product is based on GAO’s work on the long–term fiscal challenge, 

including reports and testimonies. These efforts were conducted in 

accordance with generally accepted government auditing standards. 

Additional information and related products can be found at 

http://www.gao.gov/special.pubs/longterm/longtermproducts.html

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