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United States Government

Required Supplementary Information

(Unaudited) For the Fiscal Years Ended

September 30, 2021, and 2020

The Sustainability of Fiscal Policy

One of the important purposes of the Financial Report is to help citizens and policymakers assess whether current fiscal

policy is sustainable and, if it is not, the urgency and magnitude of policy reforms necessary to make fiscal policy

sustainable. A sustainable policy is defined as one where the ratio of debt held by the public to GDP (the debt-to-GDP ratio)

is ultimately stable or declining.

As discussed below, the projections based on this report’s assumptions indicate that current policy is not sustainable.

The debt-to-GDP ratio was approximately 100 percent at the end of 2021, similar to (but slightly below) the ratio at the end

of FY 2020. If current policy is left unchanged, the projections show the debt-to-GDP ratio will exceed 200 percent by 2041

and reach 701 percent in 2096. For comparison, under the 2020 projections, the debt-to-GDP ratio exceeded 200 percent in

2042 and reached 623 percent in 2095.

These conclusions are rooted in the projected trends in receipts, spending, and deficits in the context of current law and

policy, although, as described in the following pages, there is considerable uncertainty surrounding these projections. The

projections are on the basis of policies currently in place and are neither forecasts nor predictions. Changes in policy –

including investments in infrastructure efforts to mitigate the impact of climate change and enhancements to caregiving

services to build a more resilient and sustainable economy – could have a significant effect on eventual fiscal outcomes.
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Current Policy Projections for Primary Deficits

A key determinant of growth in the debt-to-GDP ratio and hence fiscal sustainability is the ratio of the primary deficitto-GDP. The primary deficit is the difference between non-interest spending and receipts, and the primary deficit-to-GDP

ratio is the primary deficit expressed as a percent of GDP. As shown in Chart 1, the primary deficit-to-GDP ratio spiked

during 2009 through 2012 due to the 2008-09 financial crisis and the ensuing severe recession, as well as the increased

spending and temporary tax reductions enacted to stimulate the economy and support recovery. These elevated primary

deficits resulted in a sharp increase in the ratio of debt to GDP, which rose from 39 percent at the end of 2008 to 70 percent at

the end of 2012. As an economic recovery took hold, the primary deficit ratio fell, averaging 2.1 percent of GDP over 2013

through 2019. In 2020, the primary deficit-to-GDP ratio rose to 13.3 percent of GDP due to increased spending in response to

the COVID-19 pandemic and economic contraction, and the ratio of debt to GDP reached 100 percent at the end of the year.

Spending remained elevated in 2021 due to additional funding to support economic recovery, but increased receipts reduced

the primary deficit-to-GDP ratio to 10.8 percent.

The primary deficit-to-GDP ratio is projected to fall to 4.7 percent in 2022 and then decreases to 4.3 percent in 2027.

After 2027, however, increased spending for Social Security and health programs due in part to the continued retirement of

the baby boom generation is projected to result in increasing primary deficits that reach 5.0 percent of GDP in 2030. The

primary deficit peaks at 6.3 percent of GDP in 2043, then gradually decreases beyond that point as the aging of the

population continues at a slower pace, and reaches 4.9 percent in 2096, the last year of the projection period.

Trends in the primary deficit are heavily influenced by tax receipts. The receipt share of GDP was markedly depressed

in 2009 through 2012 because of the recession and tax reductions enacted as part of the ARRA and the Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The share subsequently increased to 18.0 percent

of GDP by 2015 before falling below the 30-year average of 17.1 percent in 2018, after enactment of the TCJA. As a share of

GDP, receipts were 18.1 percent of GDP in 2021, 1.8 percentage points above 2020. Receipts are projected to decrease to

17.3 percent of GDP in 2022 and then reach 18.7 percent of GDP in 2031 when corporation income tax and other receipts

stabilize as a share of GDP. After 2031, receipts grow slightly more rapidly than GDP over the projection period as increases

in real (i.e., inflation-adjusted) incomes cause more taxpayers and a larger share of income to fall into the higher individual

income tax brackets. Other possible paths for the receipts-to-GDP ratio and the implications for projected debt held by the

public are analyzed in the “Alternative Scenarios” section.

On the spending side, the non-interest spending share of GDP was 28.9 percent in 2021, slightly less than the share of

GDP in 2020, which was 29.6 percent. The ratio of non-interest spending to GDP is projected to fall to 22.0 percent in 2022

and remain near that level through 2024. After 2024, the non-interest spending share of GDP is projected to rise gradually,

reaching 25.7 percent of GDP in 2078, before declining to 25.3 percent in 2096, the end of the projection period. Beginning

in 2025, these increases are principally due to faster growth in Medicare and Social Security spending (see Chart 1). The

aging of the baby boom generation, among other factors, is projected to increase the Social Security and Medicare spending

shares of GDP by about 0.9 percentage points and 1.5 percentage points, respectively, from 2022 to 2041. After 2041, the

Social Security and Medicare spending shares of GDP continue to increase in most years, albeit at a slower rate, due to

projected increases in health care costs and population aging, before declining toward the end of the projection period.

Current Policy Projections for Debt and Interest Payments

The primary deficit projections in Chart 1, along with projections for interest rates and GDP, determine the projections

for the debt-to-GDP ratio shown in Chart 2. That ratio was approximately 100 percent at the end of FY 2021, and under

current policy and based on this report’s assumptions is projected to reach 701 percent in 2096. The continuous rise of the

debt-to-GDP ratio indicates that current policy under this report’s assumptions is unsustainable.
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As a general approximation, the change in debt held by the public from one year to the next is the budget deficit, the

difference between total receipts and total spending.1 Total spending is non-interest spending plus interest spending. Chart 3

shows that the rapid rise in total spending and the unified deficit (total receipts less total spending) is almost entirely due to

projected net interest, which results from the growing debt. As a percent of GDP, interest spending was 1.6 percent in 2021,

and under current policy is projected to reach 5.0 percent in 2033, 15.2 percent in 2057, and 31.7 percent in 2096.

1 The change in debt each year is also affected by certain transactions not included in the budget deficit, such as changes in Treasury’s cash balances and the

non-budgetary activity of federal credit financing accounts. These transactions are assumed to hold constant at about 0.3 percent of GDP each year, with the

same effect on debt as if the primary deficit was higher by that amount.
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Another way of viewing the change in the financial outlook in this year’s report relative to previous years’ reports is in

terms of the projected debt-to-GDP ratio in 2094, the last year of the 75-year projection period used in the FY 2019 report.

This ratio is projected based on this report’s assumptions to reach 682 percent in the FY 2021 projections, which compares

with 614 percent projected in the FY 2020 projections and 474 percent projected in the FY 2019 projections.2

The Cost of Delay in Closing the 75-Year Fiscal Gap

The longer policy action to close the fiscal gap3is delayed, the larger the post-reform primary surpluses must be to

achieve the target debt-to-GDP ratio at the end of the 75-year period. This can be illustrated by varying the years in which

reforms closing the fiscal gap are initiated while holding the target ratio of debt to GDP in 2096 equal to the 2021 ratio. Three

timeframes for reforms are considered, each one beginning in a different year, and each one increasing the primary surplus

relative to current policy by a fixed percent of GDP starting in the reform year. The analysis shows that the longer policy

action is delayed, the larger the post-reform primary surplus must be to bring the debt-to-GDP ratio in 2096 equal to its level

in 2021. Future generations are burdened by delays in policy changes because delay necessitates higher primary surpluses

during their lifetimes, and those higher primary surpluses must be achieved through some combination of lower spending and

higher revenue.

As previously shown in Chart 1, under current policy, primary deficits occur throughout the projection period. Table 1

shows primary surplus changes necessary to make the debt-to-GDP ratio in 2096 equal to its level in 2021 under each of the

three timeframes. If reform begins in 2022, then it is sufficient to raise the primary surplus share of GDP by 6.2 percentage

2 For additional information on changes from the 2019 projections, see the unaudited RSI in the 2020 Financial Report.

3 The fiscal gap reflects how much the primary surplus (receipts less non-interest spending) must increase to maintain the debt-to-GDP ratio at the 2021

level. See Note 26 for a more complete discussion of the fiscal gap.
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points in every year between 2022 and 2096 in order for the debt-to-GDP ratio in 2096 to equal its level in 2021. This policy

raises the average 2022-2096 primary surplus-to-GDP ratio from -5.7 percent to +0.6 percent.

In contrast to a reform that begins immediately, if reform begins in 2032 or 2042, then the primary surpluses must be

raised by 7.3 percent and 9.0 percent of GDP, respectively, in order for the debt-to-GDP ratio in 2096 to equal its level at the

end of 2021. The difference between the primary surplus increase necessary if reform begins in 2032 or 2042 and the increase

necessary if reform begins in 2022, an additional 1.1 and 2.7 percentage points, respectively, is a measure of the additional

burden policy delay would impose on future generations. The costs of delay are due to the additional debt that accumulates

between the end of 2021 and the year reform is initiated, in comparison to the scenario in which reform begins immediately.

Alternative Scenarios

The long-run projections are highly uncertain. The uncertainty in this year’s projections is further increased by the

COVID-19 pandemic. This section illustrates this inherent uncertainty by presenting alternative scenarios for the growth rate

of health care costs, interest rates, discretionary spending, and receipts. (Not considered here are the effects of alternative

assumptions for long-run trends in birth rates, mortality, and immigration.)

The population is aging rapidly and will continue to do so over the next several decades, which puts pressure on

programs such as Social Security, Medicare, and Medicaid. A shift in projected fertility, mortality, or immigration rates could

have important effects on the long-run projections. Higher-than-projected immigration, fertility, or mortality rates would

improve the long-term fiscal outlook. Conversely, lower-than-projected immigration, fertility, or mortality rates would result

in deterioration in the long-term fiscal outlook.

Effect of Changes in Health Care Cost Growth

One of the most important assumptions underlying the projections is the future growth of health care costs. These future

growth rates – both for health care costs in the economy generally and for federal health care programs such as Medicare,

Medicaid, and PPACA exchange subsidies – are highly uncertain. In particular, PPACA in 2010 and MACRA in 2015

lowered payment rates for Medicare hospital and physician payments. The Medicare spending projections in the long-term

fiscal projections are based on the projections in the 2021 Medicare Trustees’ Report, which assume the PPACA and

MACRA payment rates will be effective in producing a substantial slowdown in Medicare input cost growth. As discussed in

Note 25—Social Insurance, the Medicare projections are subject to much uncertainty about the ultimate effects of these

provisions to reduce health care cost growth. For the long-term fiscal projections, that uncertainty also affects the projections

for Medicaid and exchange subsidies, because the cost per beneficiary in these programs grows at the same reduced rate as

Medicare cost growth per beneficiary.

As an illustration of the dramatic effect of variations in health care cost growth rates, Table 2 shows the effect on the

size of reforms necessary to close the fiscal gap of per capita health care cost growth rates that are one percentage point

higher or two percentage points higher than the growth rates in the base projection, as well as the effect of delaying closure of

the fiscal gap.4 As indicated earlier, if reform is initiated in 2022, eliminating the fiscal gap requires that the 2022-2096

4 The base case health cost growth rates are derived from the projections in the 2021 Medicare Trustees’ Report. These projections are summarized and

discussed in Note 25 and the “Medicare Projections” section of the unaudited RSI for the SOSI.
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primary surplus increase by an average of 6.2 percent of GDP in the base case. However, that figure increases to 10.1 percent

of GDP if per capita health cost growth is assumed to be 1.0 percentage point higher, and 16.7 percent of GDP if per capita

health cost growth is 2.0 percentage points higher. The cost of delaying reform is also increased if health care cost growth is

higher because debt accumulates more rapidly during the period of inaction. For example, the lower part of Table 2 shows

that delaying reform initiation from 2022 to 2032 requires that 2032-2096 primary surpluses be higher by an average of 1.1

percent of GDP in the base case, 1.7 percent of GDP if per capita health cost growth is 1.0 percentage point higher, and 2.9

percent of GDP if per capita health cost growth is 2.0 percentage points higher. The dramatic deterioration of the long-run

fiscal outlook caused by higher health care cost growth shows the critical importance of managing health care cost growth.

Effects of Changes in Interest Rates

A higher debt-to-GDP ratio is likely to increase the interest rate on government debt, making it costlier for the

government to service its debt than if the debt-to-GDP ratio were lower. Table 3 displays the effect of several alternative

scenarios using different nominal (and real) interest rates than assumed in the base case on the size of reforms to close the

fiscal gap as well as the effect of delaying closure of the fiscal gap. If reform is initiated in 2022, eliminating the fiscal gap

requires that the 2022-2096 primary surplus increase by an average of 6.2 percent of GDP in the base case, 7.8 percent of

GDP if the interest rate is 2.0 percentage points higher in every year, and 7.1 percent of GDP if the interest rate is 1.0

percentage point higher in every year. The required increase in the 2022-2096 primary surplus decreases to an average of 5.4

percent of GDP if the interest rate is 1.0 percentage point lower in every year and 4.5 percent of GDP if the interest rate is 2.0

percentage points lower in every year. The cost of delaying reform is also increased if interest rates are higher, due to the fact

that interest paid on debt accumulates more rapidly during the period of inaction. For example, the lower part of Table 3

shows that delaying reform initiation from 2022 to 2032 requires that 2032-2096 primary surpluses be higher by an average

of 1.1 percent of GDP in the base case, 2.5 percent of GDP if the interest rate is 2.0 percentage points higher in every year,

and 1.7 percent of GDP if the interest rate is 1.0 percentage point higher in every year. The required increase in the 2032-

2096 primary surplus is higher by an average of 0.7 percent of GDP if the interest rate is 1.0 percentage point lower in every

year and 0.4 percent of GDP if the interest rate is 2.0 percentage points lower in every year.
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Effects of Changes in Discretionary Spending Growth

The rate of growth of discretionary spending has a large impact on long-term fiscal sustainability. The current base

projection for discretionary spending assumes that spending in 2022 equals the baseline estimate from the President’s FY

2022 Budget and then grows with nominal GDP. Under the base projection, discretionary spending is approximately 7.1

percent of GDP each year over the projection period. The implications of an alternative scenario are shown in Table 4. In the

alternative scenario, discretionary spending for 2022 is the same as in the base case and then grows with inflation and

population so as to hold discretionary spending constant on a real per capita basis. (This growth rate assumption is slower

than growth with GDP but is still higher than the standard 10-year budget baseline assumption, which assumes that

discretionary spending grows with inflation but not with population.) As shown in Table 4, if discretionary spending grows

with nominal GDP, eliminating the fiscal gap requires that the 2022-2096 primary surplus increase by an average of 6.2

percent of GDP. If discretionary spending grows with inflation and population, the fiscal gap is 3.6 percent of GDP. The cost

of delaying reform is greater when discretionary spending levels are higher. Initiating reforms in 2032 requires that the

primary surplus increase by an average of 1.1 percent of GDP per year in the base case and by an average of 0.6 percent of

GDP if discretionary levels grow with inflation and population after 2022. If delayed until 2042, the primary surplus must

increase by an average of 2.7 percent of GDP in the base case and by an average of 1.6 percent of GDP when spending grows

with inflation and population.
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Effects of Changes in Individual Income Receipt Growth

The growth rate of receipts, specifically individual income taxes, is another key determinant of long-term sustainability.

The base projections assume growth in individual income taxes over time to account primarily for the slow shift of

individuals into higher tax brackets due to real wage growth (“real bracket creep”). This assumption approximates the longterm historical growth in individual income taxes relative to wages and salaries and is consistent with current policy without

change, as future legislation would be required to prevent real bracket creep. As an illustration of the effect of variations in

individual income tax growth, Table 5 shows the effect on the size of reforms necessary to close the fiscal gap and the effect

of delaying closure of the fiscal gap if long-term receipt growth as a share of wages and salaries is 0.1 percentage point

higher than the base case, as well as 0.1 percentage point lower than the base case. If reform is initiated in 2022, eliminating

the fiscal gap requires that the 2022-2096 primary surplus increase by an average of 6.2 percent of GDP in the base case, 5.1

percent of GDP if receipt growth is 0.1 percentage point higher, and 7.4 percent of GDP if receipt growth is 0.1 percentage

point lower. The cost of delaying reform is also affected if receipt growth assumptions change, much as was the case in the

previous alternative scenarios.
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Fiscal Projections in Context

In this report, a sustainable fiscal policy has been defined as one where the federal debt-to-GDP ratio is stable or

declining over the projection period. However, this definition does not indicate what a sustainable debt-to-GDP ratio might

be. Any particular debt ratio is not the ultimate goal of fiscal policy. Rather, the goals of fiscal policy are many. They include

financing public goods, such as infrastructure and government services; promoting a strong and growing economy; and

managing the debt so that it is not a burden on future generations. These goals are interrelated, and readers should consider

how policies intended to affect one might depend on or affect another.

This report shows that current policy under this report’s assumptions is not sustainable. In evaluating policies that could

make policy sustainable, note that debt may play roles in both facilitating and hindering a healthy economy. For example,

government deficit spending supports demand and allows economies to emerge from recessions more quickly. Debt may also

be a cost-effective means of financing capital investment that promotes future economic growth, which may in turn make

future debt levels more manageable. However, economic theory also suggests that high levels of debt may contribute to

higher interest rates, leading to lower private investment and a smaller capital stock which the economy can use to grow.

Unfortunately, it is unclear what debt-to-GDP ratio would be sufficiently high to produce these negative outcomes, or

whether the key concern is the level of debt per se, or a trend that shows debt increasing over time.

While several empirical studies have attempted to discern a definite relationship between debt and economic growth

from the past experience of countries, the evidence is mixed. One study suggested that as advanced countries’ debt-to-GDP

ratios exceeded 90 percent it had significant negative consequences for real GDP growth.5 Real GDP growth is generally

lower by about 1 percent when the countries’ debt-to-GDP ratios are above 90 percent relative to the times when they are

5 Reinhart, Carmen M., Vincent R. Reinhart and Kenneth S. Rogoff. 2012. “Public Debt Overhangs: Advanced-Economy Episodes Since 1800.” Journal of

Economic Perspectives, 26(3):69.86.
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below 90 percent.6 However, after removing sample countries with very high indebtedness – those with debt-to-GDP ratios of

more than 120 percent – and very low indebtedness – those with debt-to-GDP ratios of less than 30 percent – the negative

relationship between growth and debt is difficult to determine. Another study reports that differences in average GDP growth

in countries with debt-to-GDP ratios between 30-60 percent, 60-90 percent, and 90-120 percent cannot be statistically

distinguished.7 Some countries with high debt-to-GDP ratios have been observed to experience lower-than-average growth,

while other countries with similarly high debt ratios have continued to enjoy robust growth. Analogously, low debt-to-GDP

ratios are no guarantee of strong economic growth. Moreover, the direction of causality is unclear. High debt may undermine

growth through increased interest rates and lower business confidence, or low growth may contribute to high debt by

depressed tax revenues and increased deficit spending on social safety net programs.

Nevertheless, to put the current and projected debt-to-GDP ratios in context, it is instructive to examine how the U.S.

experience compares with that of other countries. The U.S. government’s debt as a percent of GDP is relatively large

compared with central government debt of other countries, but far from the largest among developed countries. Based on

historical data as reported by the IMF for 29 advanced economies, the debt-to-GDP ratio in 2019 ranged from 5.8 percent of

GDP to 196.4 percent of GDP.8 The U.S. is not included in this set of statistics, which underscores the difficulty in

calculating debt ratios under consistent definitions, but the 2021 debt-to-GDP ratio for the U.S. government was

approximately 100 percent. Despite using consistent definitions where available, these debt measures are not strictly

comparable due to differences in the share of government debt that is debt of the central government, how government

responsibilities are shared between central and local governments, how current policies compare with the past policies that

determine the current level of debt, and how robustly each economy grows.

The historical experience of the U.S. may also provide some perspective. As Chart 4 shows, the debt-to-GDP ratio was

highest in the 1940s, following the debt buildup during World War II. In the projections in this report, the U.S. would reach

the previous peak debt ratio in 2024. However, the origins of current and future federal debt are quite different from the

wartime debt of the 1940s, which limits the pertinence of past experience.

6 Errata: “Growth in a Time of Debt,” Carmen M. Reinhart and Kenneth S. Rogoff. Harvard University, 2013.

7 Herndon, Thomas, Michael Ash, and Robert Pollard, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,”

Cambridge Journal of Economics, 2013.

8 Government Finance Statistics Yearbook, Main Aggregates and Balances, available at https://data.imf.org. Data is for D1 debt liabilities for the central

government, excluding social security funds, for Advanced Economies.
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As the cross-country and historical comparisons suggest, there is a very imperfect relationship between the current level

of central government debt and the sustainability of overall government policy. Past accrual of debt is certainly important, but

current policies and their implications for future debt accumulation are as well.

Conclusion

The projections in this Financial Report indicate that if policy remains unchanged, the debt-to-GDP ratio will steadily

increase throughout the projection period and beyond, which implies current policy under this report’s assumptions is not

sustainable and must ultimately change. Subject to the important caveat that policy changes are not so abrupt that they slow

economic growth, the sooner policies are put in place to avert these trends, the smaller are the adjustments necessary to return

the nation to a sustainable fiscal path, and the lower the burden of the debt will be to future generations.