Source: http://fmsq.treas.gov/finrep10/supp_info/fr_supplement_info_sustainability.html
Timestamp: 2014-09-20 01:51:10
Document Index: 696112895

Matched Legal Cases: ['art 1', 'art 2', 'art 1', 'art 3', 'art 3', 'art 4', 'art 1']

An important purpose 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 it sustainable. A sustainable policy is one
where the ratio of debt held by the public to GDP (debt to GDP) is stable over time. The
discussion below focuses on balancing revenues and expenditures over time, and does not
consider fairness or efficiency implications of the reforms necessary to achieve
It is shown below that, under current policy, the ratio of debt to GDP is projected to
rise continuously over the next 75 years, eventually exceeding 350 percent in 2085. If
these projections were extended beyond 2085, the deficit excluding interest would
continue as the population continues to age and if the other assumptions made for the
75-year horizon continue to hold. The persistence of the deficit excluding interest
beyond the 75-year horizon implies that the ratio of debt to GDP would continue to grow
beyond the 75-year horizon. The continuing rise in this ratio means that current policy
A key determinant of growth in the debt-to-GDP ratio and hence fiscal sustainability
is the primary deficit-to-GDP ratio. The primary deficit is the difference between
non-interest spending and receipts, and the primary deficit-to-GDP ratio is simply the
primary deficit expressed as a percent of GDP. As shown in Chart 1, the primary
deficit-to-GDP ratio grew rapidly in 2008 and 2009 due to the financial crisis and the
recession and the policies pursued to combat both, and is projected to fall rapidly to
near zero as the economy recovers. The projection period begins in 2011. After 2020, the
primary deficit-to-GDP ratio is projected to increase, reaching 2 percent in 2030 and
remaining at or above 1.8 percent through the end of the 75-year projection period and
The level of revenues as a percentage of GDP has been depressed by the recession and
tax reductions enacted as part of the ARRA. As the economy recovers and the tax cuts
expire, it is projected that the revenue share of GDP will return to near its long-run
average. Beyond that point individual income taxes are projected to grow gradually as
increases in real incomes cause more taxpayers and a larger share of total income to fall
into higher tax brackets.8 This projection assumes that
Congress and the President will continue to enact legislation that prevents the share of
income subject to the Alternative Minimum Tax from rising. On the spending side, the
projected increase in non-interest spending as a percentage of GDP is principally due to
growth in Medicare, Medicaid, and Social Security spending, as is shown in Chart 2. The
Social Security spending share of GDP is projected to increase about 1.2 percentage
points over the next 25 years as the baby boom generation retires. The same demographic
patterns will affect Medicare spending. After 2035, the Social Security spending share of
GDP is relatively steady, while the Medicare spending share of GDP continues to increase,
albeit at a slower rate, due to projected increases in health care costs. For the same
reason, Medicaid spending is also projected to rise over time.
Both Medicare and Medicaid have been significantly affected by the recently passed
health reform legislation, the Affordable Care Act (ACA). An effect of the reform is to
expand health coverage. The long-term budgetary effect will depend on the effectiveness
of provisions designed to reduce health care cost growth. The 2010 Medicare trustees'
report projects that the new law could hold down future Medicare cost growth
substantially compared with previous projections if fully implemented. The Medicare
spending projections in this Report are based on the projections in the 2010 Medicare
Trustees Report. If the trustees' report projections hold true, there will be a
substantial slowdown in future Medicare and Medicaid spending growth. That assumption is
reflected in these long-run fiscal projections. However, even with this reduced Medicare
and Medicaid spending, there is still a persistent gap between projected receipts and
projected total Federal non-interest spending.
The primary deficit projections in Chart 1, along with projections for interest rates
and GDP, determine the projections for the ratio of debt held by the public to GDP that
are shown in Chart 3. That ratio was 62 percent at the end of fiscal year 2010, and under
current policy, it is projected to exceed 70 percent in 2020, 130 percent in 2040, and
350 percent in 2085. Continued upward pressure on spending for the elderly after 75 years
because of increasing longevity implies that the debt-to-GDP ratio would continue to rise
beyond that point if there is no change in policy. The continuing rise of the debt-to-GDP
ratio suggests that current policy is unsustainable.
Chart 3 also displays the projection of debt held by the public as a percent of GDP as
published in the 2009 Financial Report. The 2010 projection is lower than the 2009
projection in every year of the projection period, with the size of the gap increasing
rapidly over time. The reduction in projected debt has decreased the size of the fiscal
gap dramatically since 2009. The improved outlook this year is almost entirely
attributable to lower projected spending for Medicare and Medicaid and increased
projected receipts that result from the ACA. The lower level of projected publicly held
debt relative to last year's projection reflects lower projected primary deficits. As
reported in Table 1, primary deficits over the 75-year projection average 1.9 percent of
GDP. For comparison, the projections in last year's report implied that the average
primary deficit would be 5.5 percent of GDP. As noted, this improvement in projected
primary deficits is largely attributable to the enactment of the ACA.
This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format. The change in debt held by the public from one year to the next is equal to the
unified budget deficit, the difference between total spending and total receipts.9 Total spending consists of non-interest spending plus interest
spending. Chart 4 reveals clearly that the rapid rise in total spending and the unified
deficit is almost entirely due to projected interest payments on the debt. As a percent
of GDP, interest spending was 1.4 percent in 2010, and under current policies it is
projected to reach 5 percent by 2030 and 19 percent by 2085.
The fiscal gap measures how much the primary surplus (receipts less non-interest
spending) must increase in order for fiscal policy to achieve a target debt-to-GDP ratio
in a particular future year. In these projections, the fiscal gap is estimated over a
75-year period, from 2011 to 2085, and the target debt-to-GDP ratio is equal to the ratio
at beginning of the projection period, in this case the end of fiscal year 2010
debt-to-GDP ratio of 62 percent of GDP.
The 75-year fiscal gap under current policy is estimated at 2.4 percent of GDP, as
reflected in Table 2. As noted in Table 1, the difference between projected programmatic
(non-interest) spending and receipts is 1.9 percent of GDP (reflecting the deficit
condition of excess spending over receipts). However, eliminating this primary deficit of
1.9 percent of GDP is not sufficient to stabilize the debt-to-GDP ratio. Because interest
rates are assumed to exceed the growth rate of GDP, reaching primary balance will still
leave debt rising relative to GDP. The average primary surplus needed to return the
debt-to-GDP ratio to its initial level and fully close the fiscal gap is 0.5 percent of
GDP per year.
This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format. The Cost of Closing the 75-Year Fiscal Gap
The longer policy action to close the fiscal gap is delayed, the larger the
post-reform primary surplus must be to stabilize the debt-to-GDP ratio by the end of the
75 year period. Varying the years in which reforms are introduced while holding constant
the ultimate target ratio of debt to GDP helps to illustrate the cost of delaying policy
changes that close the fiscal gap. The reforms considered here increase the primary
surplus relative to current policy by a fixed percent of GDP starting in the reform year.
Three such policies are considered, each beginning in a different year. The analysis
shows that the longer policy action is delayed, the larger the post-reform primary
surplus must be to stabilize the debt-to-GDP ratio in 2085. Future generations are harmed
by policy delay because higher primary surpluses imply lower spending and/or higher taxes
than would be needed with earlier deficit reduction.
As previously shown in Chart 1, under current policy, primary
deficits occur in virtually every year of the projection period. Table 2 shows primary
surplus changes necessary to make the debt-to-GDP ratio in 2085 equal to its level in
2010 under each of the three policies. If reform begins in 2011, then it is sufficient to
raise the primary surplus share of GDP by 2.4 percentage points in every year between
2011 and 2085 in order to have a debt-to-GDP ratio in 2085 equal to the level in 2010.
This raises the average 2011-2085 primary surplus-to-GDP ratio from -1.9 percent to 0.5
percent. In contrast, if reform is begun in 2021 or 2031, the primary surplus must be
raised by 2.9 percent and 3.7 percent of GDP, respectively, in order to reach a
debt-to-GDP ratio in 2085 equal to the level in 2010. The difference between the primary
surplus boost starting in 2021 and 2031 (2.9 and 3.7 percent of GDP, respectively) and
the primary surplus boost starting in 2011 (2.4 percent of GDP) is a measure of the
additional burden policy delay would impose on future generations. This policy change
could take the form of a reduction in spending, an increase in taxes, or some combination
of both that produced the same improvement in the budget surplus. The costs of delay are
due to the debt-to-GDP ratio rising during the interim period, which increases the future
amount of interest that must be covered with the primary surplus. Delaying reform
increases the cost of reaching the target debt-to-GDP ratio even if the target year is
extended beyond 2085, since the starting debt-to-GDP ratio will be higher.
This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format. These estimates likely understate the cost of delay because they do not assume
interest rates will rise as the debt-to-GDP ratio grows. If a higher debt-to-GDP ratio
increases the interest rate, making it more costly for the government to service its debt
and simultaneously slowing private investment, the primary surplus required to return the
debt-to-GDP ratio to its 2010 level will also increase. This dynamic may accelerate with
higher ratios of debt to GDP, potentially leading to the point where there may be no
feasible level of taxes and spending that would reduce the debt-to-GDP ratio to its 2010
Table 2: Cost of Delaying Fiscal Consolidation
No Delay: Reform in 2011
2.4 percent of GDP between 2011 and 2085
Ten Years: Reform in 2021
2.9 percent of GDP between 2021 and 2085
Thirty Years: Reform in 2031
3.7 percent of GDP between 2031 and 2085
This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format. Footnotes
9 Debt held by the public is also affected by certain transactions not included in the unified budget deficit, such as changes in Treasury’s cash balances and the nonbudgetary activity of Federal credit financing accounts. These transactions are assumed to net to zero in the long-range projections. (Back to Content)