United States Government Accountability Office

GAO The Nation’s Long-Term 

Fiscal Outlook

September 2006 Update

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

The Bottom Line: Today’s Fiscal 

Policy Remains Unsustainable

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. 

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. 

GAO-06-1077R 
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. 

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. 

What Drives Our 

Nation’s Bleak LongTerm Fiscal Outlook? 

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. 

In figures 2 and 3 below, 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 

Page 2 GAO-06-1077R 
Supplemental Security Income, TANF, and farm price supports.1

 The 

spending increases for all these types of spending taken together are 

dwarfed by the growth in spending for Social Security, Medicare, 

Medicaid, and interest on debt held by the public. Figure 2, which shows 

results from GAO’s more realistic simulation, is a visual depiction of how 

the magic of compounding will work against us if a gap between revenues 

and spending is allowed to continue to grow. 

Figure 2: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP After 2006 and All Expiring Tax Provisions are Extended

 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-06-1077R 
Estimated growth in the major entitlement programs results in an 

unsustainable fiscal future regardless of whether one assumes future 

revenue will be somewhat below or above historical levels as a share of 

the economy. 

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

For example, under GAO’s more optimistic simulation shown in figure 3, 

waiting until 2040 means that as a share of the economy, either taxes 

would need to be increased by almost 60 percent or total spending 

reduced by a third in order to balance the budget in that year. Sudden,

drastic changes of either kind—and revenues at such a level--are outside 

post-World War II historical experience in this country. 

Figure 3: Composition of Spending as a Share of GDP Under Baseline Extended

Page 4 GAO-06-1077R 
The Fiscal Gap—

Another Way to 

Measure the 

Challenge 

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 2. The fiscal gap can

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

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

require spending cuts or tax increases equal to 4.5 percent of the entire 

economy each year over the next 75 years, or a total of $34 trillion in 

present value terms. For GAO’s more realistic simulation, the gap is 8 

percent of the economy, or about $61 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 

between $115,000 to $200,000 per person, or between about $270,000 to 

$485,000 for each full-time 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 optimistic simulation the 

fiscal gap would grow from 4.5 percent of the economy today to 5.7 

percent in 2016 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 5 GAO-06-1077R 
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 based on 

more realistic assumptions given recent trends and assumed policy 

preferences. They vary in how they deal with the first 10 years: 

• Baseline extended. This takes the 10-year baseline estimates of the 

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

period. By law, CBO is required to assume 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 is also 

generally required by statute to assume no changes to today's laws. 

One implication of this is that CBO must assume that all tax cuts 

originally enacted in 2001 and 2003 expire as currently scheduled. 

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

domestic product) 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. 

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. Since 1992 we have held revenues and 

discretionary spending constant as shares of GDP after the CBO 

estimation period so as to make no policy assumptions. In addition, after 

the first 10 years, both simulations use the Social Security and Medicare 

Trustees’ 75-year intermediate estimates for those programs and assume 

that promised benefits will be paid in full. 

The long-term outlook has not changed significantly since the last 

simulations. Although this year’s deficit outlook has improved, the longterm continues to be unsustainable. 

What Changed in This 

Update?

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

economic estimates in its August Budget and Economic Outlook: An 

Update. CBO’s report can be found at 

http://www.cbo.gov/showdoc.cfm?index=7492&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.

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