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 
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. 

Highlights of GAO-04-585T, a testimony 

before the Subcommittee on Legislative 

and Budget Process, Committee on Rules, 

House of Representatives 

March 23, 2004

BUDGET PROCESS

Long-term Focus Is Critical 

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 longterm 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. 

Selected Fiscal Exposures (End of FY 2003) 

Explicit financial 

contingencies

Explicit financial 

commitments

Explicit liabilities

Example (dollars in billions)

Publicly held debt ($3,913)

Military and civilian pension and post-retirement health ($2,857)

Veterans benefits payable ($955)

Environmental and disposal liabilities ($250)

Loan guarantees ($35)

Undelivered orders ($596)

Long-term leases ($47)

Unadjudicated claims ($9)

Pension Benefit Guaranty Corporation ($86)

Other national insurance programs ($7)

Government corporations e.g., Ginnie Mae

Debt held by government accounts ($2,859)a

Future Social Security benefit payments ($3,550)b

Future Medicare Part A benefit payments ($5,931)b

Future Medicare Part B benefit payments ($9,619)b

Life cycle cost including deferred and future maintenance and 

 operating costs (amount unknown)

Government Sponsored Enterprises e.g., Fannie Mae and 

 Freddie Mac

Type

Source: GAO analysis.

Implicit exposures implied by 

current policies or the public's 

expectations about the role of 

government

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.

The structure of the budget process 

can help ensure that budget 

decision makers are presented with 

the information and choices for 

timely and informed decisionmaking. GAO’s 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. 

The reinstitution of realistic 

spending caps and PAYGO is 

necessary to deal with the nearand 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 government’s 

commitments, OMB should report 

annually on fiscal exposures, 

including a concise list and cost 

estimates, where possible. To 

address the nation’s 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 government’s tax policy 

and enforcement programs. 
Page 1 GAO-04-585T Budget Process 

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 nearand 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 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 

The Long-term Budget 

Challenge 
Page 2 GAO-04-585T Budget Process 

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. 
Page 3 GAO-04-585T Budget Process 

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 

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. 

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. 

0

10

20

30

40

50

2003 2015 2030 2040

Fiscal year

Revenue

All other spending

Medicare and Medicaid

Social Security

Net interest

Percent of GDP

Source: GAO’s January 2004 analysis.
Page 4 GAO-04-585T Budget Process 

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 20421

 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 

 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. 
Page 5 GAO-04-585T Budget Process 

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 longterm 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. 

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.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 expenditures3

 may have uncertain 

or accelerating future growth paths that have significant implications for 

the long term. Although economic growth can help, our projected fiscal 

 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. 

Fiscal Exposures Are 

Wide-ranging and 

Varied 
Page 6 GAO-04-585T Budget Process 

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) 

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. 

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 

Explicit financial 

contingencies

Explicit financial 

commitments

Explicit liabilities

Example (dollars in billions)

Publicly held debt ($3,913)

Military and civilian pension and post-retirement health ($2,857)

Veterans benefits payable ($955)

Environmental and disposal liabilities ($250)

Loan guarantees ($35)

Undelivered orders ($596)

Long-term leases ($47)

Unadjudicated claims ($9)

Pension Benefit Guaranty Corporation ($86)

Other national insurance programs ($7)

Government corporations e.g., Ginnie Mae

Debt held by government accounts ($2,859)a

Future Social Security benefit payments ($3,550)b

Future Medicare Part A benefit payments ($5,931)b

Future Medicare Part B benefit payments ($9,619)b

Life cycle cost including deferred and future maintenance and 

 operating costs (amount unknown)

Government Sponsored Enterprises e.g., Fannie Mae and 

 Freddie Mac

Type

Source: GAO analysis.

Implicit exposures implied by 

current policies or the public's 

expectations about the role of 

government
Page 7 GAO-04-585T Budget Process 

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. 

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 

Where Do We Go 

from Here? 
Page 8 GAO-04-585T Budget Process 

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 
Page 9 GAO-04-585T Budget Process 

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 
Page 10 GAO-04-585T Budget Process 

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. 

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 

Looking More Broadly 
Page 11 GAO-04-585T Budget Process 

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. 

(450309) 
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