**GAO-07-1144T**                      Published: Jul 25, 2007. Publicly Released: Jul 25, 2007.                  

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## Highlights

This testimony relates to the broader question: How should we deal with our nation's long-term fiscal challenge in order to help ensure that our future is better than our past? This testimony will start with our longer-term fiscal challenge. Then it will turn to the process question you present at this hearing: the reimposition of a statutory PAYGO rule(s) as a step toward dealing with this challenge. Finally it will talk about moving beyond caps and PAYGO to some ideas on how improved transparency and process changes can help in the effort to put us on a more prudent and sustainable long-term fiscal path. As widely reported earlier this month, the Administration now expects the deficit for fiscal year 2007 to be $205 billion, down from its February estimate of $244 billion and last year's deficit of $248 billion. However, because these numbers include the Social Security surpluses, they mask what GAO likes to call the "operating deficit" now estimated to be $385 billion for fiscal year 2007. Clearly lower short-term deficits are better than higher short-term deficits. However, our real challenge is not short-term deficits, rather it's the long-term structural deficits and related debt burdens that could swamp our ship of state if we do not get serious soon. Specifically, while our near-term fiscal picture is better, our long-term fiscal outlook is not. Health care costs are still growing faster than the economy and the population is still aging. Indeed, what we call the long-term fiscal challenge is not in the distant future. The first of the baby boomers become eligible for early retirement under Social Security on January 1, 2008--less than 1 year from now-- and for Medicare benefits in 2011--just 3 years later. The budget and economic implications of the baby boom generation's retirement have already become a factor in 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 long-term fiscal path that is getting worse with the passage of time. Herbert Stein once said that something that is not sustainable will stop. That, however, should not give us comfort. Clearly, it is more prudent to change the path than to wait until a crisis occurs. While restraint in the near term and efforts to balance the budget over the next 5 years can be positive, they are not enough. It is also important that we take steps to address our longer-term fiscal imbalance. The real problem is not the nearterm 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 over and focus on the long-term implications of current and proposed spending and tax policies. GAO will suggest a number of things that it believes will help in this area in this testimony. These remarks are based on our previous work on a variety of issues, including reports and testimonies on our nation's long-term fiscal challenges and budget process reform. These efforts were conducted in accordance with generally accepted government auditing standards.

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## Topics

Budget and Spending

AccountabilityBudget controllabilityBudget deficitBudget obligationsEntitlement programsFinancial analysisFiscal policiesFuture budget projectionsPresidential budgetsTransparency