United States Government Accountability Office

GAO Testimony 

Before the Committee on the Budget, 

House of Representatives 

LONG-TERM BUDGET 

OUTLOOK 

Deficits Matter—Saving Our 

Future Requires Tough 

Choices Today 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:00 a.m. EST 

Tuesday, January 23, 2007

 

GAO-07-389T 
Chairman Spratt, Mr. Ryan, Members of the Committee: 

I appreciate this invitation to talk with you about why deficits matter—

about our nation’s long-term fiscal outlook and the challenge it presents. 

Your decision to focus on this issue is an important statement about the 

seriousness with which you view this challenge and your commitment to 

begin to address it. 

You all have entitled this hearing “Why Deficits Matter.” Let me start with

a very simple reason: they matter for the world we leave our children and 

grandchildren. As all of you know—and as I will discuss in this 

statement—it is not the short-term deficit that threatens us; it is the longterm fiscal outlook. We are on an imprudent and unsustainable path. 

Continuing on our current fiscal path would gradually erode, if not 

suddenly damage, our economy, our standard of living, and ultimately 

even our domestic tranquility and our national security. This is a great 

nation with much to be proud of and much to be thankful for. But today 

we are failing in one of our most important stewardship responsibilities—

our duty to pass on a country better positioned to deal with the challenges 

of the future than the one we were given. 

The picture I will lay out for you today is not a pretty one and it’s getting 

worse with the passage of time. But this nation has met difficult 

challenges—including challenges to its very existence—in the past and I’m 

confident that we can do so again. 

The essence of my message today is no surprise to Members of this 

Committee: 

• Our current financial condition is worse than is widely understood. 

• Our current fiscal path is both imprudent and unsustainable.

• Improvements in information and processes are needed and can help. 

• Meeting our long-term fiscal challenge will require (1) significant 

entitlement reform to change the path of those programs; (2) 

reprioritizing, restructuring and constraining other spending programs; 

and (3) more revenues—hopefully through a reformed tax system. 

This will take bipartisan cooperation and compromise. 

• The time to act to save our future is now! 

When fiscal year 2006 ended a great deal of attention was paid to the fact 

that at $248 billion “the deficit” came in lower than originally predicted 

and lower than in 2005. And just this week press reports have noted 

Page 1 GAO-07-389T 
that—as figure 1 shows—the (unified) deficit as a share of the economy is

not terribly high. 

Figure 1: Unified Surplus or Deficit as a Share of Gross Domestic Product (GDP), 

Fiscal Years 1940–2006 

-35

-30

-25

-20

-15

-10

-5

0

5

10

1940 1950 1960 1970 1980 1990 2000 2006

Fiscal Years

Percent of GDP

Source: Department of Commerce, Office of Management and Budget, and Congressional Budget Office. 

This is all true—and it is also misleading. First, a single year’s unified 

budget deficit is not the critical issue here. Certainly this improvement in 

the 1-year fiscal picture is better than a worsening in that picture, but it did 

not fundamentally change our long-term fiscal outlook. In fact, the U.S. 

government’s total reported liabilities, net social insurance commitments, 

and other fiscal exposures continue to grow and now total approximately 

$50 trillion, representing approximately four times the nation’s total 

output, or gross domestic product (GDP) in fiscal year 2006, up from about 

$20 trillion, or two times GDP in fiscal year 2000.

Further, the long-term challenge is fast becoming a short-term one as the 

first of the baby boomers become eligible for early retirement under Social 

Security on January 1, 2008—less than one year—and for Medicare 

benefits in 2011—less than 4 years from now. The budget and economic 

implications of the baby boom generation’s retirement have already 

become a factor in the Congressional Budget Office’s (CBO) 10-year 

baseline projections and will only intensify as the baby boomers age. 

Simply put, our nation is on an imprudent and unsustainable fiscal path. 

Herbert Stein once said that something that is not sustainable will stop. 

Page 2 GAO-07-389T 
That, however, should not give us comfort. It is more prudent to change 

the path than to wait until a crisis occurs. 

And that brings me to my next point. While restraint in the near term and 

efforts to balance the budget over the next 5 years can be positive, it is 

important that actions to achieve this also address the long-term fiscal 

outlook. The real problem is not the near-term deficit—it is the long-term 

fiscal outlook. It is important to look beyond year 5 or even year 10. Both 

the budget and the budget process need more transparency about and 

focus on the long-term implications of current and proposed spending and 

tax policies. In this testimony I will suggest a number of things that I 

believe will help in this area. 

A great deal of budget reporting focuses on a single number—the unified 

budget deficit, which was $248 billion in fiscal year 2006. This largely 

cash-based number represents the difference between revenues and 

outlays for the government as a whole. It is an important measure since it 

is indicative of the government’s draw on today’s credit markets—and its 

claim on today’s economy. But it also masks the difference between 

Social Security’s cash flows and those for the rest of the budget. Therefore 

we also need to look beneath the unified deficit at the on-budget deficit—

what I like to call the “operating deficit.” And, finally, we should be 

looking at the financial statements’ report of net operating cost—the 

accrual-based deficit. 

Our Fiscal and 

Financial Condition Is 

Worse Than Widely

Understood 

Social Security currently takes in more tax revenue than it needs to pay 

benefits. This cash surplus is invested in Treasury securities and earns 

interest in the form of additional securities. The difference between the 

on-budget deficit and the unified budget deficit is the total surplus in 

Social Security (cash and interest) and the U.S. Postal Service. Excluding

consideration of the $185 billion surplus in Social Security and a $1 billion 

surplus in the Postal Service, the on-budget deficit was $434 billion in 

2006. Figure 2 shows graphically how the on-budget deficit and the offbudget surplus have related and combine to lead to the unified deficit. 

Since the Social Security trust fund invests any receipts not needed to pay 

benefits in Treasury securities, its cash surplus reduces the amount the 

Treasury must borrow from the public. As I will note later, this pattern of 

cash flows is important—and it is projected to come to an end just 10 

years from now. 

Page 3 GAO-07-389T 
Figure 2: Surplus or Deficit as a Share of GDP, Fiscal Years 1962–2006 

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

19621965 1970 1975 1980 1985 1990 1995 2000 2006

Fiscal Years

On-budget Off-budget Unified

Percent of GDP

Sources: Office of Management and Budget, Department of the Treasury, and Congressional Budget Office. 

The third number, net operating cost, is the amount by which costs exceed 

revenue and it is reported in the federal government’s financial statements, 

which are prepared using generally accepted accounting principles.1

 Costs 

are recorded on an accrual basis—namely, in the period when goods are 

used or services are performed as opposed to when the resulting cash 

payments are made. However, most revenues, on the other hand, are 

recorded on the modified cash basis—that is, they are recorded when 

collected. The net operating cost can be thought of as the accrual deficit. 

The accrual measure primarily provides more information on the longerterm implications of today’s policy decisions and operations by showing 

certain costs incurred today but not payable for years to come, such as 

civilian and military pensions and retiree health care. In fiscal year 2006 

net operating cost was $450 billion. 

All three of these numbers are informative. However, neither accrual nor 

cash measures alone provide a full picture of the government’s fiscal 

condition or the cost of government. Used together, they present 

complementary information and provide a more comprehensive picture of

 1

 The Financial Report of the United States Government, 2006 can be found at

www.fms.treas.gov/fr/index.html. 

Page 4 GAO-07-389T 
the government’s financial condition today and fiscal position over time. 

For example, the unified budget deficit provides information on borrowing

needs and current cash flow. The accrual deficit provides information on 

the current cost of government, but it does not provide information on 

how much the government has to borrow in the current year to finance 

government activities. Also, while accrual deficits provide more 

information on the longer-term consequences of current government 

activities, they do not include the longer-term cost associated with social 

insurance programs like Social Security and Medicare. In addition, they 

are not designed to provide information about the timing of payments and

receipts, which can be very important. Therefore, just as investors need 

income statements, statements of cash flow, and balance sheets to 

understand a business’s financial condition, both cash and accrual 

measures are important for understanding the government’s financial 

condition.2

 

Although looking at both the cash and accrual measures provides a more 

complete picture of the government’s fiscal stance today and over time 

than looking at either alone, even these together do not tell us the full 

story. For example, as shown in table 1, all three of these deficits 

improved between fiscal year 2005 and fiscal year 2006.

3

 This 

improvement, however, did not result from a change in the fundamental 

drivers of our long-term challenge and did not signal an improvement in 

that outlook. To understand the long-term implications of our current 

path requires more than a single year’s snapshot. In this regard, the longterm outlook has worsened significantly in the last several years. That is 

why for more than a decade GAO has been running simulations to tell this

longer-term story. 

 2

 GAO is responsible for auditing the financial statements included in the Financial Report, 

but we have been unable to express an opinion on them for 10 years because the federal 

government could not demonstrate the reliability of significant portions of the financial 

statements, especially in connection with the Department of Defense. Accordingly, 

amounts taken from the Financial Report may not be reliable. 

3

 The decline in both the cash and accrual deficits in 2006 was primarily driven by an

increase in federal revenue by almost 12 percent. In addition, the decline in the accrual

deficit relative to the cash deficit was primarily due to a decrease in accrual-based 

expenses resulting from changes in assumptions that are the basis for actuarial estimates 

for certain accrued long-term liabilities. For a discussion of how the accrual and cash 

deficits relate to each other see GAO, Understanding Similarities and Differences 

between Accrual and Cash Deficits, GAO-07-117SP (Washington, D.C.: December 2006) 

and Understanding Similarities and Differences between Accrual and Cash Deficits, 

Update for Fiscal Year 2006, GAO-07-341SP (Washington, D.C. January 2006). 

Page 5 GAO-07-389T 
Table 1: Fiscal Year 2005 and 2006 Deficits and Net Operating Cost 

Dollars in billions 

Fiscal year 2005 Fiscal year 2006

 On-budget deficit ($494) ($434)

 Unified deficit (318) (248)

 Net operating costa(760) (450)

Sources: Office of Management and Budget and Department of the Treasury. 

a

 Fiscal year 2005 and 2006 net operating cost figures reflect significant but opposite changes in

certain actuarial costs. For example, changes in interest rates and other assumptions used to 

estimate future veterans’ compensation benefits increased net operating cost by $228 billion in 2005 

and reduced net operating cost by $167 billion in 2006. 

As I mentioned, it is not the recent past shown in figure 1—nor the outlook

for this year—that should concern us. Rather it is the picture in figure 3 

that should worry us. 

Long-term fiscal simulations by GAO, CBO, and others all show that we 

face large and growing structural deficits driven primarily by rising health 

care costs and known demographic trends. GAO runs simulations under 

two sets of assumptions. One takes the legislatively-mandated baseline 

from CBO for the first 10 years and then keeps discretionary spending and

revenues constant as a share of GDP while letting Social Security, 

Medicare, and Medicaid grow as projected by the Trustees and CBO under 

midrange assumptions.4

 The other, perhaps more realistic, scenario based 

on the Administration’s announced policy preferences changes only two

things in the first 10 years: discretionary spending grows with the 

economy and all expiring tax provisions are extended.5

 Like the “Baseline

Extended” scenario, after 10 years both revenues and discretionary 

spending remain constant as a share of the economy. As figure 3 shows, 

deficits spiral out of control under either scenario. We will be updating 

these figures with the release of the new CBO baseline later this month, 

but even with the lower deficit in 2006, the long-term picture will remain 

daunting. 

The Current Longterm Fiscal Outlook is 

Unacceptable 

 4

 Social Security and Medicare spending is based on the May 2006 Trustees’ intermediate 

projections. Medicaid spending is based on CBO’s December 2005 long-term projections 

under midrange assumptions.

5

Additional information about the GAO model, its assumptions, data, and charts can be 

found at http://www.gao.gov/special.pubs/longterm/. 

Page 6 GAO-07-389T 
Figure 3: Unified Surpluses and Deficits as a Share of GDP under Alternative Fiscal 

Policy Simulations 

-20

-15

-10

-5

0

5

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Fiscal year

Percent of GDP

Baseline

D Extended iscretionary spending

grows with the economy

and all expiring tax

provisions extended

Source: GAO’s August 2006 analysis. 

Note: Assumes currently scheduled Social Security benefits are paid in full throughout the simulation 

period. 

Looking more closely at each scenario gives a fuller understanding of what

the impact of continuing these trends would have on what government 

does. And it shows us “Why Deficits Matter.” 

First, it makes sense to look back to 2001—it is worth understanding how 

much worse the situation has become. As I noted, despite some recent 

improvements in short-term deficits, the long-term outlook is moving in 

the wrong direction. 

Figures 4 and 5 show the composition of spending under our “Baseline 

Extended” scenario in 2001 and 2006. Even with short-term surpluses, we 

had a long-term problem in 2001, but it was more than 40 years out. 

Certainly an economic slowdown and various decisions driven by the 

attacks of 9/11 and the need to respond to natural disasters have 

contributed to the change in outlook. However, these items alone do not 

account for the dramatic worsening. Tax cuts played a major role, but the 

single largest contributor to the deterioration of our long-term outlook 

was the passage of the Medicare prescription drug benefit in 2003. 

Page 7 GAO-07-389T 
Figure 4: Composition of Spending as a Share of GDP under Baseline Extended,

January 2001

0

10

20

30

40

50

2005 2015 2030 2040

Fiscal year

Percent of GDP

Net interest Social Security Medicare & Medicaid All other spending

Revenue

Source: GAO’s January 2001 analysis. 

Note: All other spending is net of offsetting interest receipts in 2015–2040. 

Figure 5: Composition of Spending as a Share of GDP under Baseline Extended,

August 2006 

0

10

20

30

40

50

2005 2015 2030 2040

Fiscal year

Percent of GDP

Net interest Social Security Medicare & Medicaid All other spending

Revenue

Source: GAO’s August 2006 analysis. 

Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2016 

due to (1) real bracket creep, (2) more taxpayers becoming subject to the alternative minimum tax, 

and (3) increased revenue from tax-deferred retirement accounts. After 2016, revenue as a share of 

GDP is held constant. 

Page 8 GAO-07-389T 
Figure 5 illustrates today’s cold hard truth, that neither slowing the growth

in discretionary spending nor allowing the tax provisions to expire—nor 

both together—would eliminate the imbalance. This is even clearer under

the more realistic scenario as shown in figure 6. Estimated growth in the 

major entitlement programs results in an unsustainable fiscal future 

regardless of whether one assumes future revenue will be somewhat 

above historical levels as a share of the economy as in the first simulation 

(fig. 5) or lower as shown in figure 6.

Figure 6: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2006 and All Expiring Tax Provisions Are Extended

0

10

20

30

40

50

2005 2015 2030 2040

Fiscal year

Percent of GDP

Net interest Social Security Medicare & Medicaid All other spending

Revenue

Source: GAO’s August 2006 analysis. 

Both these simulations remind us “Why Deficits Matter.” They illustrate 

that without policy changes on the spending and revenue side of the 

budget, the growth in spending on federal retirement and health 

entitlements will encumber an escalating share of the government’s 

resources. A government that in our children’s lifetimes does nothing more 

than pay interest on its debt and mail checks to retirees and some of their 

health providers is unacceptable. 

Although Social Security is a major part of the fiscal challenge, contrary to

popular perception, it is far from our biggest challenge. While today Social 

Security spending exceeds federal spending for Medicare and Medicaid, 

that will change. 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. CBO estimates that Medicare and Medicaid spending will reach 

Page 9 GAO-07-389T 
6.3 percent of GDP in 2016, up from 4.6 percent this year (2007), while 

spending for Social Security will only reach 4.7 percent of GDP in 2016 up 

from 4.2 percent this year. For this reason and others, rising health care 

costs pose a fiscal challenge not just to the federal budget but also to 

states, American business, and our society as a whole. 

While there is always some uncertainty in long-term projections, two 

things are certain: the population is aging and the baby boom generation is

nearing retirement age. The aging population and rising health care 

spending will have significant implications not only for the budget but also 

for the economy as a whole. Figure 7 shows the total future draw on the 

economy represented by Social Security, Medicare, and Medicaid. Under 

the 2006 Trustees’ intermediate estimates and CBO’s long-term Medicaid 

estimates, federal spending for these entitlement programs combined will 

grow to 15.5 percent of GDP in 2030 from today’s 9 percent. This graphic is 

another illustration of why we have to act. I do not believe we are 

prepared to have programs that provide income for us in retirement and 

pay our doctors absorb this much of our children’s and grandchildren’s 

economy. It is clear that taken together, Social Security, Medicare, and 

Medicaid under current law represent an unsustainable burden on future 

generations.

Figure 7: Social Security, Medicare, and Medicaid Spending

0

5

10

15

20

25

30

2000 2010 2020 2030 2040 2050 2060 2070 2080

Percent of GDP

Social Security

Medicaid

Medicare

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary, Centers 

for Medicare and Medicaid Services, and the Congressional Budget Office. 

Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2006 

Trustees’ Reports. Medicaid projections based on CBO’s August 2006 short-term Medicaid estimates 

and CBO’s December 2005 long-term Medicaid projections under midrange assumptions. 

Page 10 GAO-07-389T 
While Social Security, Medicare, and Medicaid dominate the long-term 

outlook, they are not the only federal programs or activities that bind the 

future. Part of what we owe the future is leaving enough flexibility to meet 

whatever challenges arise. So beyond dealing with the “big 3,” we need to

look at other policies that limit that flexibility—not to eliminate all of them 

but to at least be aware of them and make a conscious decision about 

them. The federal government undertakes a wide range of programs, 

responsibilities, and activities that obligate it to future spending or create 

an expectation for spending and potentially limit long-term budget 

flexibility. GAO has described the range and measurement of such fiscal 

exposures—from explicit liabilities such as environmental cleanup 

requirements to the more implicit obligations presented by life-cycle costs

of capital acquisition or disaster assistance. 

Figure 8 shows that despite improvement in both the fiscal year 2006 

reported net operating cost and the cash-based budget deficit, the U.S. 

government’s major reported liabilities, social insurance commitments, 

and other fiscal exposures continue to grow. They now total 

approximately $50 trillion—about four times the nation’s total output 

(GDP) in fiscal year 2006—up from about $20 trillion, or two times GDP in 

fiscal year 2000. 

Clearly, despite recent progress on our short-term deficits, we have been 

moving in the wrong direction in connection with our long-range 

imbalance in recent years. Our long-range imbalance is growing daily due

to continuing deficits, known demographic trends, rising health care costs, 

and compounding interest expense. 

Page 11 GAO-07-389T 
Figure 8: Major Reported Fiscal Exposures (Dollars in Trillions) 

$50.5

7.9

13.1

11.3

6.4

38.8

1.3

$10.4

2006 

147

197

140

52

2000 % Increase

$20.4

--

6.5

2.7

3.8

13.0

0.5

$6.9

• E.g., PBGC, undelivered orders

Total

• Future Medicare Part D benefits

• Future Medicare Part B benefits

• Future Medicare Part A benefits

• Future Social Security benefits

• Implicit exposures

• Commitments & contingencies

• Publicly held debt

• Military & civilian pensions & retiree health

• Other

• Explicit liabilities

$50.5

7.9

13.1

11.3

6.4

38.8

1.3

$10.4

2006 

147

197

140

52

2000 % Increase

$20.4

--

6.5

2.7

3.8

13.0

0.5

$6.9

• E.g., PBGC, undelivered orders

Total

• Future Medicare Part D benefits

• Future Medicare Part B benefits

• Future Medicare Part A benefits

• Future Social Security benefits

• Implicit exposures

• Commitments & contingencies

• Publicly held debt

• Military & civilian pensions & retiree health

• Other

• Explicit liabilities

Source: Department of Treasury. 

Notes: Data from 2000 and 2006 Financial Report of the United States Government. Estimates for 

Social Security and Medicare are at present value as of January 1 of each year and all other data are

as of September 30. Percentage increases are based on actual data and may differ from increases 

calculated from rounded data shown in table. 

We all know that it is hard to make sense of what “trillions” means. Figure 

9 provides some ways to think about these numbers: if we wanted to put 

aside today enough to cover these promises, it would take $170,000 for 

each and every American or approximately $440,000 per American 

household. Considering that median household income is about $46,000, 

the household burden is about 9.5 times median income. 

Figure 9: Understanding the Size of Our Major Reported Fiscal Exposures 

Disposable personal income per capita $31,519

Ratio of household burden to median income 9.5

$46,326

$440,000

$400,000

$170,000

95 percent

$53.3 trillion

$50.5 trillion

2006

Income

Median household income

Ratio of fiscal exposures to net worth

Per household

Burden

Major reported fiscal exposures 

Per person

Per full-time worker

Total household net worth

Disposable personal income per capita $31,519

Ratio of household burden to median income 9.5

$46,326

$440,000

$400,000

$170,000

95 percent

$53.3 trillion

$50.5 trillion

2006

Income

Median household income

Ratio of fiscal exposures to net worth

Per household

Burden

Major reported fiscal exposures 

Per person

Per full-time worker

Total household net worth

Sources: GAO analysis of data from the Department of the Treasury, Federal Reserve Board, U.S. Census Bureau and Bureau of 

Economic Analysis

Page 12 GAO-07-389T 
Since at its heart the budget challenge is a debate about the allocation of 

limited resources, the budget process can and should play a key role in

helping to address our long-term fiscal challenge and the broader 

challenge of modernizing government for the 21st century. I have said that

Washington suffers from myopia and tunnel vision. This can be especially 

true in the budget debate in which we focus on one program at a time and 

the deficit for a single year or possibly the costs over 5 years without 

asking about the bigger picture and whether the long term is getting better 

or worse. We at GAO are in the transparency and accountability business. 

Therefore it should come as no surprise that I believe we need to increase 

the understanding of and focus on the long term in our policy and budget 

debates. To that end—as I noted earlier—I have been talking with a 

number of Members of the Senate and the House as well as various groups 

concerned about this issue concerning a number of steps that might help.

I’ve attached a summary of some of these ideas to this statement. Let me 

highlight several critical elements here. 

Process and 

Presentational 

Changes to Increase 

Transparency and 

Focus on Long-Term 

Consequences Can 

Help 

• The President’s budget proposal should again cover 10 years. This is 

especially important given that some policies—both spending and tax—

cost significantly more (or lose significantly more revenue) in the second 5 

years than in the first. In addition, the budget should disclose the impact of 

major tax or spending proposals on the short, medium, and long term. 

• The executive branch should also provide information on fiscal 

exposures—both spending programs and tax expenditures—that is, the 

long-term budget costs represented by current individual programs, 

policies, or activities as well as the total. 

• The budget process needs to pay more attention to the long-term 

implication of the choices being debated. For example, elected 

representatives should be provided with more explicit information on the 

long-term costs of any major tax or spending proposal before it is voted 

upon. It is sobering to recall that during the debate over adding 

prescription drug coverage to Medicare, a great deal of attention was paid 

to whether the 10-year cost was over or under $400 billion. Not widely 

publicized—and certainly not surfaced in the debate—was that the present 

value of the long-term cost of this legislation was about $8 trillion! 

Of course, when you are in a hole, the first thing to do is stop digging. I 

have urged reinstitution of the statutory controls—both meaningful caps 

on discretionary spending and pay-as-you-go (PAYGO) on both the tax and 

spending sides of the ledger—that expired in 2002. However given the 

severity of our current challenge, Congress should look beyond the return

to PAYGO and discretionary caps. Mandatory spending cannot remain on 

autopilot—it will not be enough simply to prevent actions to worsen the 

Page 13 GAO-07-389T 
outlook. We have suggested that Congress might wish to design “triggers” 

for mandatory programs—some measure that would prompt action when

the spending path increased significantly. In addition, Congress may wish 

to look at rules to govern the use of “emergency supplementals.” However, 

as everyone in this committee knows, these steps alone will not solve the 

problem. That is why building in more consideration of the long-term 

impact of decisions is necessary. 

There is no easy way out of the challenge we face. Economic growth is 

essential, but we will not be able to simply grow our way out of the 

problem. The numbers speak loudly: our projected fiscal gap is simply too 

great. To “grow our way out” of the current long-term fiscal gap would 

require sustained economic growth far beyond that experienced in U.S. 

economic history since World War II. 

Similarly, those who believe we can solve this problem solely by cutting

spending or solely raising taxes are not being realistic. While the 

appropriate level of revenues will be part of the debate about our fiscal 

future, making no changes to Social Security, Medicare, Medicaid, and 

other drivers of the long-term fiscal gap would require ever-increasing tax 

levels—something that seems both inappropriate and implausible. That is 

why I have said that substantive reform of Social Security and our major 

health programs remains critical to recapturing our future fiscal flexibility. 

I believe we must start now to reform these programs. 

Although the long-term outlook is driven by Social Security and health 

care costs, this does not mean the rest of the budget can be exempt from 

scrutiny. Restructuring and constraint will be necessary beyond the major 

entitlement programs. This effort offers us the chance to bring our 

government and its programs in line with 21st

 century realities.

6

 Many tax 

expenditures act like entitlement programs, but with even less scrutiny. 

Other programs and activities were designed for a very different time. 

Taken together, entitlement reform and reexamination of other programs 

and activities could engender a national discussion about what Americans 

Meeting the LongTerm Fiscal Challenge 

Requires Action on 

the Spending and Tax 

Sides of the Budget--

Cooperation and 

Compromise Will Be 

Necessary 

 6

 GAO, 21 Century Challenges: Reexamining the Base of the Federal Government st , 

GAO-05-325SP (Washington, D.C.: February 2005) and Suggested Areas for Oversight for 

the 110th Congress, GAO-07-235R (Washington, D.C.: Nov. 17, 2006).

Page 14 GAO-07-389T 
want from their government and how much they are willing to pay for 

those things. 

Finally, given demographic and health care cost trends, the size of the 

spending cuts necessary to hold revenues at today’s share of GDP seems 

implausible. It is not realistic to assume we can remain at 18.2 percent of 

GDP—we will need more revenues. Obviously we want to minimize the 

tax burden on the American people and we want to remain competitive 

with other industrial nations—but in the end the numbers have to add up. 

As I noted, we need to start with real changes in existing entitlement 

programs to change the path of those programs. However, reform of the 

major entitlement programs alone will not be sufficient. Reprioritization 

and constraint will be necessary in other spending programs. Finally, we 

will need more revenues—hopefully through a reformed tax system. 

The only way to get this done is through bipartisan cooperation and 

compromise—involving both the Congress and the White House. 

Delay only makes matters worse. GAO’s simulations show that if no action

is taken, balancing the budget in 2040 could require actions as large as 

cutting total federal spending by 60 percent or raising federal taxes to two 

times today’s level. 

For many years those of us who talk about the need to put Social Security 

on a sustainable course and to reform Medicare have talked about the 

benefits of early action. Acting sooner rather than later can turn 

compound interest from an enemy to an ally. Acting sooner rather than 

later permits changes to be phased in more gradually and gives those 

affected time to adjust to the changes. Delay does not avoid action—it just 

makes the steps that have to be taken more dramatic and potentially 

harder. 

Unfortunately, it is getting harder to talk about early action—the future is 

upon us. 

Next year members of the baby boom generation start to leave the labor 

force. Figure 10 shows the impact of demographics on labor force growth. 

Further Delay Will 

Only Worsen the 

Outlook 

Page 15 GAO-07-389T 
Figure 10: Labor Force Growth Will Continue to Decline 

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration. 

Note: Percentage change is calculated as a centered 5-yr moving average of projections based on 

the intermediate assumptions of the 2006 Trustees’ Reports. 

Reflecting this demographic shift, CBO projects the average annual growth 

rate of real GDP will decline from 3.1 percent in 2008 to 2.6 percent in the 

period 2012–2016. This slowing of economic growth will come just as 

spending on Social Security, Medicare and Medicaid will begin to 

accelerate—accounting for 56 percent of all federal spending by 2016 

compared to 43 percent in 2006. 

As I noted earlier, today Social Security’s cash surplus helps offset the 

deficit in the rest of the budget, thus reducing the amount Treasury must 

borrow from the public and increasing budget flexibility—but this is about 

to change. 

Growth in Social Security spending is expected to increase from an 

estimated 4.8 percent in 2008 to 6.5 percent in 2016. The result, as shown 

in figure 11, is that the Social Security surpluses begin a permanent decline 

in 2009. At that time the rest of the budget will begin to feel the squeeze 

since the ability of Social Security surpluses to offset deficits in the rest of 

the budget will begin to shrink. In 2017 Social Security will no longer run a 

cash surplus and will begin adding to the deficit. That year Social Security 

will need to redeem the special securities it holds in order to pay benefits. 

Treasury will honor those claims—the United States has never defaulted. 

But there is no free money. The funds to redeem those securities will have 

0

1

2

3

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Percentage change (5-yr moving average)

Page 16 GAO-07-389T 
to come from higher taxes, lower spending on other programs, higher 

borrowing from the public, or a combination of all three. 

Figure 11: Projected Cash Surpluses and Deficits in the Combined Social Security 

Trust Fund 

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration. 

Note: Projections based on the intermediate assumptions of the 2006 Trustees’ Reports. The 

consumer price index is used to adjust from current to constant dollars. 

I spoke before of how big the changes would have to be if we were to do 

nothing until 2040. Of course, we won’t get to that point—something will 

force action before then. If we act now, we have more choices and will 

have more time to phase-in related changes. 

Chairman Spratt, Mr. Ryan, Members of the Committee—in holding this 

hearing even before the President’s Budget is submitted you are signaling

the importance of considering any proposal within the context of the longterm fiscal challenge. This kind of leadership will be necessary if progress 

is to be made. 

I have long believed that the American people can accept difficult 

decisions as long as they understand why such steps are necessary. They 

need to be given the facts about the fiscal outlook: what it is, what drives 

it, and what it will take to address it. As most of you know, I have been 

investing a good deal of time in the Fiscal Wake-Up Tour (FWUT) led by 

-400

-300

-200

-100

0

100

200

2005 2010 2015 2020 2025 2030 2035 2040

Calendar year

Cash deficits begin

2017

Billions of 2006 dollars

Concluding Remarks 

Page 17 GAO-07-389T 
the Concord Coalition. Scholars from both the Brookings Institution and 

the Heritage Foundation join with me and Concord in laying out the facts 

and discussing the possible ways forward. In our experience, having these 

people, with quite different policy views on how to address our long-range 

imbalance, agree on the nature, scale, and importance of the issue—and 

on the need to sit down and work together—resonates with the audiences. 

Although the major participants have been Concord, GAO, Brookings, and 

Heritage, others include such organizations as the Committee for 

Economic Development (CED); the American Institute of Certified Public 

Accountants (AICPA); the Association of Government Accountants (AGA); 

the National Association of State Auditors, Comptrollers and Treasurers 

(NASACT); and AARP. The FWUT also has received the active support and 

involvement of community leaders, local colleges and universities, the 

media, the business community, and both former and current elected

officials. We have been to 17 cities to-date. The discussion has been 

broadcast on public television stations in Atlanta and Philadelphia. Earlier 

this month OMB Director Portman and former Senator Glenn joined us at 

an event at the John Glenn School of Public Affairs at Ohio State 

University in Columbus, Ohio. 

The specific policy choices made to address this fiscal challenge are the 

purview of elected officials. The policy debate will reflect differing views 

of the role of government and differing priorities for our country. What the 

FWUT can do—and what I will continue to do—is lay out the facts, 

debunk various myths, and prepare the way for tough choices by elected 

officials. The American people know—or sense—that there is something 

wrong; that these deficits are a problem. If they understand that there truly 

is no magic bullet—if they understand that 

• we cannot grow our way out of this problem; 

• eliminating earmarks will not solve the problem; 

• wiping out fraud, waste, and abuse will not solve the problem; 

• ending the war or cutting way back on defense will not solve the problem; 

• restraining discretionary spending will not solve the problem; and 

• letting the recent tax cuts expire will not solve this problem; 

then the American people can engage with you in a discussion about what 

government should do and how. 

People ask me how I think this can happen. I know that some Members 

believe a carefully structured commission will be necessary to prepare a 

package while others feel strongly that elected officials should take up the 

task of developing that package. Whatever the vehicle, success will 

Page 18 GAO-07-389T 
require the active and open-minded involvement of both parties in and 

both houses of the Congress and of the President. With that it should be 

possible to develop a package which accomplishes at least three things: 

(1) a comprehensive solution to the Social Security imbalance—one that is 

not preprogrammed to require us to have to come back again, (2) Round I 

of comprehensive tax reform, and (3) Round I of Health Care Reform. 

This is a great nation. We have faced many challenges in the past and we 

have met them. It is a mistake to underestimate the commitment of the 

American people to their children and grandchildren; to underestimate 

their willingness and ability to hear the truth and support the decisions 

necessary to deal with this challenge. We owe it to our country, to our 

children and to our grandchildren to address this fiscal imbalance. The 

world will present them with new challenges—we need not bequeath them 

this burden too. The time for action is now. 

Mr. Chairman, Mr. Ryan, Members of the Committee, let me repeat my 

appreciation for your commitment and concern in this matter. We at GAO 

stand ready to assist you in this important endeavor. 

For further information on this testimony, please contact Susan J. Irving at 

(202) 512-9142 or irvings@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Individuals making key contributions to this testimony 

include Jay McTigue, Assistant Director; Linda Baker and Melissa Wolf. 

Contact and 

Acknowledgments 

Page 19 GAO-07-389T 
Page 20 GAO-07-389T 

Appendix I: Ideas for Improving the 

Transparency of Long-term Costs and the 

Attention Paid to These Costs before 

Decisions Are Made 

• Produce an annual Statement of Fiscal Exposures, including a concise list 

and description of exposures, cost estimates where possible, and an 

assessment of methodologies and data used to produce such cost 

estimates. 

• Increase the transparency of tax expenditures by including them in the 

annual Fiscal Exposures Statement and, where possible, also showing 

them along with spending and credit programs in the same policy area. 

• Provide information on the impact of major tax or spending proposals on 

short-term, mid-term, and long-term fiscal exposures and on the path of 

surplus/deficit and debt as percent of gross domestic product (GDP) over 

10-year and longer-term horizons (and assuming no sunset if sunset is part 

of the proposal). 

• Cover 10 years in the budget. 

• Consider requiring the President to include in his annual budget 

submission a long-term fiscal goal (e.g., balance, surplus, or deficit as 

percent of GDP). 

• Prepare and publish a Summary Annual Report or Citizen’s Summary that 

summarizes, in a clear, concise, plain English, and transparent manner, 

key financial and performance information included in the Consolidated 

Financial Report. 

• Prepare and publish a report on long-range fiscal sustainability every 2 to 4 

years. 

• Require improved disclosure—at the time proposals are debated but 

before they are adopted—of the long-term costs of individual mandatory 

spending and tax proposals over a certain size and for which costs will 

ramp up over time. 

Supplemental Reporting 

in the President’s Annual 

Budget Submission 

Additional Executive 

Branch Reports 

Additional Cost 

Information on Proposals 

before Adoption 

GAO Reports • An annual report or reports by GAO including comments on the 

Consolidated Financial Statement (CFS), results of the latest long-term 

fiscal simulations, comments on the adequacy of information regarding 

long-term cost implications of existing and proposed policies in the 

previous year as well as any other significant financial and fiscal issues. 
• Use accrual budgeting for the following areas where cash basis obligations

do not adequately represent the government’s commitment: 

• employee pension programs (pre-Federal Employee Retirement System 

employees); 

• retiree health programs; and 

• federal insurance programs, such as the Pension Benefit Guaranty 

Corporation and crop insurance. 

• Explore techniques for expanding accrual budgeting to 

• environmental cleanup and 

• social insurance—could consider deferring recognition of social 

insurance receipts until they are used to make payments in the future 

(this was suggested in GAO’s accrual budgeting report as an idea to 

explore, possibly with a commission designed to explore budget 

concepts). 

Page 21 GAO-07-389T 

Other Areas in Which 

GAO Has Suggested That 

Congress Might Consider 

Changing the Budget 

Treatment 

(450563) 
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