21st Century Challenges: Reexamining the Base of the Federal Government
Published: 2005-02-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This report stems from the recognition that the Congress faces a daunting challenge: the need to bring government and its programs in line with 21st century realities. This challenge has many related pieces: addressing the nation's large and growing long-term fiscal gap; deciding on the appropriate role and size of the federal government--and how to finance that government--and bringing the panoply of federal activities into line with today's world. The reexamination questions discussed in this report are drawn primarily from the work GAO has done for the Congress over the years. Many of these questions do not represent immediate crises, however many pose important longer-term threats to the country's fiscal and economic, and national security as well as the quality of life for our children and grandchildren.
section_title: What GAO Found
paragraphs: GAO describes the forces at work, the challenges they present, and the 21st century questions they prompt, in each of 12 broad areas based in large measure on functional areas in the federal budget, but also including governmentwide issues and the revenue side of the budget. These areas include (1) long-term fiscal challenges; (2) policy frameworks, such as the aging population and increasing global interdependence; (3) changing security threats; and (4) governance challenges. The size of the fiscal challenge and the significance of the societal and economic changes worldwide means this kind of examination and the hard choices necessary to restore a sustainable fiscal path and modernize government may take a generation to address.

section_title: Letter
paragraphs: Thank you for the opportunity to present and discuss the report we are  issuing today entitled 21st Century Challenges: Reexamining the Base of  the Federal Government. We appreciate the interest and support of this  committee and others of GAO’s efforts to produce this report for the  Congress. This report stems from the recognition that the Congress faces a  daunting challenge: the need to bring government and its programs in line  with 21st century realities. This challenge has many related pieces:  addressing our nation’s large and growing long-term fiscal gap; deciding on  the appropriate role and size of the federal government—and how to  finance that government—and bringing the panoply of federal activities  into line with today’s world. We believe that GAO has an obligation to assist  and support the Congress in this effort. The reexamination questions  discussed in today’s report are offered in that spirit: they are drawn  primarily from the work GAO has done for the Congress over the years. We  have attempted to structure questions that we hope you will find useful as  the Congress determines which issues it plans to examine and act on. Many  of the questions in this report do not represent immediate crises, however  many pose important longer term threats to our country’s fiscal and  economic, and national security as well as the quality of life for our  children and grandchildren.
As I have said before, our nation is on an unsustainable fiscal path. Long- term budget simulations by GAO, the Congressional Budget Office (CBO),  and others show that, over the long term we face a large and growing  structural deficit due primarily to known demographic trends and rising  health care costs. Continuing on this unsustainable fiscal path will  gradually erode, if not suddenly damage, our economy, our standard of  living, and ultimately our national security. All reasonable simulations  indicate that the problem is too big to be solved by economic growth alone  or by making modest changes to existing spending and tax policies. Rather,  a fundamental reexamination of major spending and tax policies and  priorities will be important to recapture our fiscal flexibility and ensure  that our programs and priorities respond to emerging social, economic, and  security changes and challenges.
Ultimately, this reexamination will entail a national discussion about what  Americans want from their government and how much they are willing to  pay for those things. It will also involve how the government should  conduct its business for the 21st century. Many, if not most, current federal  programs and policies were designed decades ago to respond to trends and  challenges that existed at the time of their creation. Our recent entry into a  new century has helped to remind us of how much has changed in the past  several decades—whether it be rapid shifts in the aging of our population,  the globalization of economic transactions, the significant advances in  technology, and changing security threats. If government is to effectively  address these trends, it cannot accept its existing programs, policies and  activities as “givens.” Outmoded commitments and operations can  constitute an encumbrance on the present and future that can erode the  capacity of the nation to better align its government with the needs and  demands of a changing world and society.
Rethinking the base of existing federal spending and tax programs is an  important step in this process. A periodic reexamination offers the  prospect of addressing emerging needs by weeding out programs and  policies that are outdated and ineffective. Those programs that remain  relevant can be updated and modernized by improving their targeting and  efficiency through such actions as redesigning allocation and cost sharing  provisions, consolidating facilities and programs and streamlining and  reengineering operations and processes. The tax policies and programs  financing the federal budget can also be reviewed with an eye toward the  overall level of revenues that are necessary to fund government operations  and commitments, the mix of taxes that should be used, and the extent to  which the tax code is used to promote certain societal objectives.
In my testimony today I will try to provide a context for, and a guide to, this  report. First, I will talk about why and how we developed this report.  Next,  I will touch on the long-term fiscal challenge, which provides the primary  impetus for this overall reexamination effort. The bulk of my statement  deals with five of the fundamental trends that are shaping the world and the  federal role in our economy and our society:  demographics, global  interdependence, economic change, evolving security threats and  governance challenges. In this discussion I’ll talk about how the issues  discussed in this report can be used to assist you in your policy making and  oversight activities.
subsections: section_title: Reexamining the Base of the Federal Government
paragraphs: Let me start by telling you a little more about the genesis of this report.  GAO has long had a statutory responsibility for monitoring the nation’s  finances. Recently, in our role as the auditor of the U.S. government’s  consolidated financial statements, we included an emphasis paragraph in  the audit report for fiscal year 2004 expressing our concerns about the  unsustainability of the nation’s long-term fiscal outlook. This conclusion  was based on the results of fiscal year 2004 and GAO’s long-term budget  model, which we have used since 1992.
Moreover, as you know, in our role as the audit, evaluation, and  investigative arm of the Congress, we have provided our perspectives on a  wide range of key performance and accountability challenges facing the  federal government, both in numerous reports and testimonies over the  years and compendiums such as our high-risk reports. We have also looked  forward by developing a strategic plan, consistent with the Government  Performance and Results Act (GPRA) and in consultation with the  Congress, identifying the emerging forces and trends that are impairing the  United States, its citizens and its position in the world.
Given these trends and challenges facing the nation, we believe that GAO  now has an obligation to provide policymakers with the benefit of our  institutional knowledge to identify selected areas throughout government  that could be considered for reexamination and review. Drawing on our  past and pending work—about 90 percent of which is either requested by  the Congress or required by law—we have provided examples of the kinds  of hard choices stemming from these challenges in the form of questions  for elected officials and other policy makers to consider. These 21st century  questions cover discretionary spending, mandatory spending including  entitlements, as well as tax policies and programs.
The specific 21st century questions were based, in part, on GAO’s strategic  plan for serving the Congress, which identified major trends that will  shape the federal role in the future. (See table 1.)
These trends, along with GAO’s institutional knowledge and issued work,  helped us identify the major challenges and specific questions. The specific  questions were informed by a set of generic evaluation criteria which are  useful for reviewing any government program or activity; these are  displayed in table 2.
In the report, we describe the forces at work, the challenges they present,  and the 21st century questions they prompt, in each of 12 broad areas based  in large measure on functional areas in the federal budget, but also  including governmentwide issues and the revenue side of the budget as  listed in table 3.
Our report contains over 200 individual illustrative questions in these 12  areas. In the remainder of my statement I will discuss some of the  questions in the context of the major strategic challenges facing the nation.
section_title: Long-term Fiscal Challenge Provides Reexamination Impetus
paragraphs: Chairman Collins, the nation is facing a range of important new forces that  are already working to reshape American society, our place in the world  and the role of the federal government. Our capacity to address these and  other emerging needs and challenges will be predicated on when and how  we deal with our fiscal challenges—the long-term fiscal pressures we face  are daunting and unprecedented in the nation’s history. The size and trend  of our projected longer term deficits means that the nation cannot ignore  the resulting fiscal pressures—it is not a matter of whether the nation deals  with the fiscal gap, but when and how. Unless we take effective and timely  action, our near-term and longer-term deficits present the prospect of  chronic and seemingly perpetual budget shortfalls and constraints  becoming a fact of life for years to come. Not only would continuing  deficits eat away at the capacity of everything the government does, but  they will erode our ability to address the wide range of emerging needs and  demands competing for a share of a shrinking budget pie.
GAO’s long-term simulations illustrate the magnitude of the fiscal  challenges we will face in the future. Figures 1 and 2 present these  simulations under two different sets of assumptions. In the first, simulation  is based on the CBO January baseline—constructed according to the  statutory requirements for that baseline. Consistent with these  requirements, this simulation assumes no changes in current law, that  discretionary spending is assumed to grow with inflation for the first 10  years, and that tax cuts which are currently scheduled to expire will expire.  After 2015, discretionary spending is assumed to grow with the economy,  and revenue is held constant as a share of GDP at the 2015 level. In the  second figure, only two assumptions are changed:  (1) discretionary  spending is assumed to grow with the economy rather than merely with  inflation for the entire period (not just after 2015), and (2) all tax cuts  which are currently scheduled to expire are made permanent. For both  simulations Social Security and Medicare spending is based on the 2004  trustees’ intermediate projections, and we assume that benefits continue to  be paid in full after the trust funds are exhausted. Medicaid spending is  based on CBO’s December 2003 long-term projections under mid-range  assumptions.
As both these simulations illustrate, absent policy changes on the spending  and/or 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. Indeed, when we assume that recent tax  reductions are made permanent and discretionary spending keeps pace  with the economy, our long-term simulations suggest that by 2040 federal  revenues may be adequate to pay little more than interest on the federal  debt. Neither slowing the growth in discretionary spending nor allowing  the tax provisions to expire—nor both together—would eliminate the  imbalance. Although revenues will likely 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 at least a  doubling of taxes in the future—and that seems both inappropriate and  implausible. Accordingly, substantive reform of Social Security, Medicare  and other major mandatory programs remains critical to recapturing our  future fiscal flexibility.
The government can help ease our nation’s future fiscal burdens through  actions on the spending and/or revenue side that reduce debt held by the  public, increase saving for the future, and enhance the pool of economic  resources available for private investment and long-term growth.  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. Closing the current long-term fiscal gap would  require sustained economic growth far beyond that experienced in U.S.  economic history since World War II. Tough choices are inevitable, and the  sooner we act the better.
section_title: Fundamental Forces Will Test Existing Policy Frameworks
paragraphs: Fiscal necessity can become the mother of invention and of much needed  reforms in government programs and activities. The nation’s continued  economic progress, social well being and national security in the 21st  century will in large part depend on how we adapt and respond to these  rapid changes and growing fiscal challenges.
We hope the reexamination questions presented in our report today can  facilitate a fundamental overview and reexamination of the base of  government programs, policies and activities. As I noted earlier, in  organizing these questions we started with major trends that are shaping  the world and the federal role in our economy and our society. I’d like to  spend some time today discussing five of the trends we have identified in  our strategic plan for serving the Congress and how they prompt the need  to consider the base of government across several of the 12 areas  addressed in the report. I’ll start with demographics, including the aging of  our population, and then discuss increasing global interdependence,  economic change, evolving security threats and changing governance  systems.
subsections: section_title: An Aging Population
paragraphs: As the baby boomers age, people will live longer and spend more time in  retirement. As shown in figure 3, the U.S. elderly dependency ratio is  expected to continue to increase. The proportion of the elderly population  relative to the working-age population in the U.S. rose from 13 percent in  1950 to 19 percent in 2000. By 2050, there is projected to be almost one  elderly dependent for every three people of working age—a ratio of 32  percent. Additionally, the average life expectancy of males at birth has  increased from 66.6 in 1960 to 74.3 in 2000, with females at birth  experiencing a rise from 73.1 to 79.7 over the same period. As general life  expectancy has increased in the United States, there has also been an  increase in the number of years spent in retirement.
A falling fertility rate is the other principal factor underlying the growth in  the elderly share of the population. In the 1960s, the fertility rate was an  average of three children per woman. Today it is a little over two, and by  2030 it is expected to fall to 1.95. The combination of these factors means  that annual labor force growth will begin to slow after 2010 and by 2025 is  expected to be less than a fifth of what it is today. (See fig. 4.) Thus,  relatively fewer workers will be available to produce the goods and  services that all will consume. Lower labor force growth will lead to slower  growth in the economy and to slower growth of federal revenues.
As noted earlier, these trends have major implications for federal budget  policy and will prompt a reexamination of national retirement programs,  health care and workforce policies. Although considerable uncertainty  surrounds long-term budget projections, we know two things for certain:  the population is aging and the baby boom generation is approaching  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 5 shows the total future draw on the economy  represented by Social Security, Medicare, and Medicaid. Under the 2004  Trustees’ intermediate estimates and CBO’s long-term Medicaid estimates,  spending for these entitlement programs combined will grow to 15.6  percent of GDP in 2030 from today’s 8.5 percent. It is clear that, taken  together, Social Security, Medicare, and Medicaid represent an  unsustainable burden on future generations.
These trends portend major changes in our current national social  insurance system. A core element of the system was a certain and secure  retirement income component—with Social Security as a foundation.  Social Security is intended to be supplemented by a private pension system  and individual savings arrangements—which, in combination, sought to  conquer the long-standing economic fear of poverty in old age. Effectively  responding to the long-term and structural challenges discussed above will  entail fundamental and comprehensive reassessment of each of the key  components of our retirement and disability system.
Social Security could be brought into balance over the next 75 years in  various ways. If reforms were to be instituted today, an immediate increase  in payroll taxes of 15 percent or an immediate reduction in currently  promised benefits of 13 percent, or some combination of the two would be  required to bring the program into balance. Waiting to reform the system  will require even greater changes as time passes. Encouraging older  workers to extend their labor force participation can also improve the  solvency and sustainability of the program while enhancing overall  economic growth.
Weaknesses in the nation’s private pension system have also become  evident. Traditional defined benefit plans where employers rather than  employees bear the risk of investment have been shrinking for decades,  and recent terminations of plans have threatened the solvency of the  Pension Benefit Guaranty Corporation (PBGC). Policymakers will need to  consider how to best encourage wider pension coverage and enhance  pension security. They will also need to consider how the private pension  system and any related reforms will interact with prospective changes in  Social Security.
Meanwhile, federal disability programs, such as those at the Social Security  Administration (SSA) and the Department of Veterans Affairs (VA), are  challenged by significant growth over the past decade that is expected to  surge even more as increasing numbers of baby boomers reach their  disability-prone years. Federal disability programs remain mired in  concepts from the past and are poorly positioned to provide meaningful  and timely support for workers with disabilities. Advances in medicine and  science have redefined what constitutes an impairment to work, and the  nature of work itself has shifted toward service and knowledge-based  employment—these developments need to be reflected in agencies’  eligibility and review processes.
Although Social Security is currently the largest program in the federal  budget, it will soon be eclipsed by Medicare and Medicaid, which are fast  growing programs in the federal budget both now and over the longer term.  Many policymakers, industry experts, and medical practitioners contend  that the U.S. health care system—in both the public and private sectors—is  in crisis. Long-term health spending growth in Medicare and Medcaid is  driven by both the aging of the population and the rapid growth of health  care costs. In the private sector, employers and other private purchasers of  health care services find that the soaring cost of health insurance  premiums poses a threat to their competitive position in an increasingly  global market.
Despite the significant share of the economy consumed by health care, a  number of key U.S. health outcomes continue to lag behind other  industrialized nations. The United States now spends over 15 percent of its  gross domestic product on health care—far more than other major  industrialized nations. Yet relative to these nations, the United States  performs below par in such measures as rates of infant mortality, life  expectancy, and premature and preventable deaths. Moreover, evidence  suggests that the American people are not getting the best value for their  health care dollars. Studies show that quality is uneven across the nation,  with a large share of patients not receiving clinically proven, effective  treatments. At the same time, access to basic health care coverage remains  an elusive goal for nearly 45 million Americans without insurance, with a  growing percentage of workers losing their employer-based coverage.  Many more millions of Americans are underinsured or have lost some of  the benefits their health plans previously afforded.
The policy process will be challenged to fundamentally rethink the design  of our health care system. Defining differences between wants, needs,  affordability, and sustainability will be fundamental to rethinking the  design of our current health care system. Among the areas that should be  on the table is how to balance responsibility for financing health care  among government at all levels, employers and individuals. In the past  several decades, the responsibility for financing health care at the point of  delivery has shifted away from the individual patient, falling from nearly  half—46 percent—of health care spending 40 years ago to 14 percent today.  Tax preferences for insured individuals and their employers have also  shifted some of the financial burden for private health care to all taxpayers.  Tax policies permit the value of employees’ health insurance premiums to  be excluded from the calculation of their taxable earnings and exclude the  value of the premium from the employers’ calculation of payroll taxes for  both themselves and employees. These tax exclusions represent a  significant source of forgone federal revenue and work at cross-purposes  to the goal of moderating health care spending. Health savings accounts  and other consumer-directed plans, which shift more of health financing to  the individual, also have been accorded various tax preferences.
Promoting consistent quality of care is another challenge facing the health  care system. Public and private payers are experimenting with payment  reforms designed to foster the delivery of care that is clinically proven to be  effective. Ideally, identifying and rewarding efficient providers and  encouraging inefficient providers to emulate best practices will result in  better value for the dollars spent on care. However, implementing  performance-based payment reforms, among other strategies, on a  systemwide basis, will depend on system components that are not  currently in place nationwide—such as compatible information systems to  facilitate the production and dissemination of medical outcome data,  safeguards to insure the privacy of electronic medical records, improved  transparency through increased measurement and reporting efforts, and  incentives to encourage adoption of evidence-based practices. These same  system components would be required to develop medical practice  standards, which could serve as the underpinning for effective medical  malpractice reform while reducing costs and improving quality of care.  Policymakers would need to consider the extent to which federal  leadership could foster these system components.
As the foregoing suggests, the aging population will have profound  implications for our policies and programs. The following kinds of  questions illustrate the kinds of choices we face:   Social Security—How should Social Security be reformed to provide  for long-term program solvency and sustainability while also ensuring  adequate benefits (for example, increase the retirement age, restructure  benefits, increase taxes, and/or create individual accounts)?
Labor Force—How can existing policies and programs be reformed to  encourage older workers to work longer and to facilitate phased  retirement approaches to employment (for example, more flexible work  schedules or receiving partial pensions while continuing to work)?
Private Pensions—What changes should be made to enhance the  retirement income security of workers while protecting the fiscal  integrity of the PBGC insurance program (for example, increasing  transparency in connection with underfunded plans, strengthening  pension funding rules, modifying PBGC’s premium structure and  insurance guarantees, or restricting benefit increases and the  distribution of lump sum benefits in connection with certain  underfunded plans)?
Disability programs—How can federal disability programs, and their  eligibility criteria, be brought into line with the current state of science,  medicine, technology, and labor market conditions?
Health care reform—How can we perform a systematic reexamination  of our current health care system? For example, could public and  private entities work jointly to establish formal reexamination  processes that would (1) define and update as needed a minimum core  of essential health care services, (2) ensure that all Americans have  access to the defined minimum core services, (3) allocate responsibility  for financing these services among such entities as government,  employers, and individuals, and (4) provide the opportunity for  individuals to obtain additional services at their discretion and cost?
Health care financing—How can health care tax incentives be  designed to encourage employers and employees to better control  health care costs? For example, should tax preferences for health care  be designed to cap the health insurance premium amount that can be  excluded from an individual’s taxable income?
Health care quality—How can industry standards for acceptable care  be established and payment reforms be designed to bring about  reductions in unwarranted medical practice variation? For example,  what can or should the federal government do to promote uniform  standards of practice for selected procedures and illnesses?
section_title: Increasing Global Interdependence
paragraphs: The rapid increase in the movement of economic and financial goods,  people, and information around the world demonstrates that the nation is  no longer self-contained, either in its problems or their solutions. The  growing interdependence of nations—globalization—has brought clear  economic and social benefits. But while the world has “gotten smaller,” it  has raised new challenges for policymakers that require the nation to be  involved in or respond to events outside its borders.
One measure of growing worldwide interdependence is the total share of  world goods and services that is traded. As shown in figure 6, from 1970  through 2005, world exports increased from about 12 percent to about 28  percent of world GDP. Hence, all over the world, people are depending  more and more on other nations to consume the goods they produce and to  produce the goods they in turn consume.
In addition, the internationalization and liberalization of financial markets  worldwide, along with growing wealth in many countries, have fueled huge  increases in cross-border investments. Information is also moving across  borders, as indicated by the rapid adoption of the use of the Internet—from  1991 through 2001 the number of Internet users increased from 4.4 million  to 502 million.
Increased global interdependency and rapid technological advancement in  the financial services industry pose significant challenges to U.S. regulatory  institutions. The present federal financial regulatory structure evolved  largely as a result of periodic ad hoc responses to crises such as financial  panics. Thus the current regulatory structure includes numerous regulators  that specialize in areas such as banking, securities, futures, and insurance  but that have difficulty seeing the total risk across industry lines of the  entities they regulate. In the last few decades, however, the financial  services industry, especially as represented by the largest firms, has  evolved, becoming more global, more concentrated, complex, and  consolidated across sectors, and increasingly converging in terms of  product offerings. Consumers are faced with an increasingly complicated  array of options for managing their personal finances and selecting  investments and credit products. Individuals can also invest in companies  worldwide and can be defrauded or have their identities stolen from almost  anywhere.
The shift to a global economy is challenging customary federal approaches  to education and employment. The global economy, advances in  technology, and the availability of foreign workers, enable work to be  shifted to other countries or render some U.S. jobs obsolete. If we are to  compete effectively, our educational system must provide the means for  adults to continue to learn new skills and enhance their existing abilities  and competitive posture. As an increasingly volatile job market creates and  eliminates jobs, federal programs that train new workers or support  workers who lose their jobs must also be capable of responding to sudden  changes in the economy. It will also be important to consider whether the  number of visas allowed for both employment and education may affect  long-term competitiveness, and our ability to build bridges with other  nations, their people, and their cultures while also addressing our national  and homeland security needs.
Global and shifting trade patterns create a range of challenges for  policymakers. The high level of U.S. trade deficits, rapid increases in  imports from nations such as China, and the increase in services trade have  led to questions about the best way to ensure that trade is fair and  contributes to the well-being of Americans. The globalization of economic  activity is bringing an increasing share of the U.S. economy under the  domain of international agreements. Economic activity historically viewed  as isolated from international trade agreements, such as local government  procurement practices, may come under the scrutiny of other parties to the  trade agreements, and increasingly be subject to their enforcement  machinery.
The U.S. position in the worldwide economy has fundamentally changed,  and increasing globalization and the shifting of business income overseas  prompts questions about the adminstrability and sustainability of our  current income-based tax system. Furthermore, the Internal Revenue  Service faces significant tax enforcement challenges. The tax gap—the  difference between what taxpayers annually report and pay and what they  should have reported and paid in taxes—was estimated at over $300 billion  in 2001, and IRS has been challenged in recent years to assess and collect  taxes stemming from increasingly complex international business activity  and transactions. The ongoing debate over tax system reform is partly  about whether the tax revenues needed to fund the federal government can  best be raised using the current structure, which is heavily dependent on  income taxes, or a fundamentally different structure, which might include  more dependence on consumption taxes. As policymakers grapple with  such issues, they will have to balance multiple objectives such as economic  growth, equity, effectiveness, simplicity, transparency, fairness, and  administrability while raising the needed revenue.
As the foregoing suggests, globalization will have profound implications for  our policies and programs. The following kinds of questions illustrate the  kinds of choices we face:   Financial regulation—Is it time to modernize our financial regulatory  system by consolidating various federal regulatory agencies to promote  a more coherent and integrated structure while specifying federal goals  more clearly?
Financial literacy—What role should the federal government take in  improving financial literacy among consumers, and what are the most  effective strategies for doing so?
Workforce retraining—Do current workforce retraining programs  provide adequate incentives to help the United States develop lifelong  learning strategies and proactive training programs? Should current  federally funded training programs operated across multiple federal  agencies—9 federal agencies administer 44 such programs—be better  integrated and restructured to increase their cost effectiveness?
Domestic subsidies—Do current federal agricultural policies and  programs, which largely rely on subsidies, contribute to unfair trade? In  addition, do current policies remain relevant to the modern agricultural  sector?
Tax enforcement—How can we best strengthen enforcement of tax  laws to give taxpayers confidence that their friends, neighbors, and  business competitors are paying their fair share?
Taxation of international transactions—Is the federal income-based  tax system sustainable and administrable in a global economy? How  should we tax the income of U.S. multinational corporations that is  earned outside of the United States?
Tax system base—To what extent should the basis of the existing  system be changed from an income to a consumption base? Would such  a change help respond to challenges posed by demographic, economic,  and technological changes?  How would reforms address such issues as  the impact on state and local tax systems and the distribution of burden  across the nation’s taxpayers?
section_title: Promoting Economic Growth in a Knowledge- Based Society
paragraphs: Many of the issues facing the Congress and the nation stem from complex  and evolving domestic and global economies. Ultimately, sustaining and  increasing economic growth over the longer term is essential to provide  resources for a smaller cohort of workers to support an aging society. The  nation’s shift to a knowledge-based economy has underscored the  importance of science and technology for economic growth and  productivity and has placed greater emphasis on public policies that rely on  market forces and competition. Over the longer term, the financial burdens  facing the smaller cohort of future workers in an aging society would most  certainly be lessened if the economic pie were enlarged.
The move away from the nation’s traditional, manufacturing-based  economy toward one characterized by the production of information,  knowledge and services has contributed to a resurgence of productivity  growth. Labor productivity growth accelerated from 1.6 percent per year in  the early 1990s to 2.9 percent per year from 1996 through 2003.
Sustaining this relatively high rate of productivity will present challenges to  policymakers. Because intellectual assets are the underpinning of a  knowledge-based economy, investment in human capital is fundamental to  continued growth. For policymakers, this shift requires greater attention to  education and training, both for children and adults. New importance will  need to be given to continuing education and training for adults, whose  longer life expectancies will allow them to stay in the workforce longer.  The shift to a knowledge-based economy also has implications for  immigration policy. The emergence of technology-oriented industries has  created growing reliance on workers from other countries, working either  in the United States or in their home countries. In light of heightened  concern for homeland security, the flow of workers into the country is  being reassessed.
Other key factors that drive sustained growth in the changing economy  include research and development expenditures, trade openness, and  effective public and private infrastructure. Advances in science and  technology in the United States, along with the nation’s strong research and  development infrastructure and intellectual property protections, have  long ensured the United States a leadership position in the development  and commercialization of scientific advances and have helped nurture  entrepreneurship and dissemination of information on new technologies.  However, other nations are gaining in their research infrastructure and are  beginning to challenge the preeminent position of the United States,  challenging policymakers to further stimulate greater private research and  collaborative scientific initiatives. Information technology advancements  have contributed to substantial gains in U.S. productivity, but  interconnectivity has also raised the potential for unauthorized access to  personal and confidential data and created new vulnerabilities to the  nation’s critical operations and the infrastructures they support.
Effective public infrastructure is also an important underpinning for long- term growth. Increasing passenger and freight travel has led to growing  congestion, and policymakers face the challenge of promoting more  integrated, intermodal transportation systems. Transcending the  boundaries of levels of government, as well as separate funding streams for  different modes, will be essential if we are going to provide efficient  movement of goods and people for a 21st century economy.
Underlying land use planning practices can both reflect transportation  policies as well as further exacerbate mobility challenges. Specifically,  sprawling development places undue stress on transportation systems, as  well as on energy, water, and the environment. In many parts of the  country, water shortages are expected over the next 10 years, which will  necessitate difficult tradeoffs between competing claimants for this  increasingly scarce resource.
The sustainability of economic growth and higher productivity levels also  depend in large part on our national saving. Saving and investment drive  the productivity growth that allows personal incomes to rise without  accelerating inflation. However, national saving remains at both historically  and comparably low levels. Historically, the most direct way for the federal  government to increase saving has been to reduce the deficit (or run a  surplus). Although the government may try to increase personal saving,  results of these efforts have been mixed. For example, even with the  preferential tax treatment granted since the 1970s to encourage retirement  saving, the personal saving rate has generally steadily declined. (See fig. 7.)
In recent years, personal saving by households has reached record lows,  while at the same time the federal budget deficit has climbed. Accordingly,  national saving has plummeted, but the economy has continued to grow, in  part because more and better investments were made. That is, each dollar  saved bought more investment goods, and a greater share of saving was  invested in highly productive information technology. The economy has  also continued to grow because the United States was able to invest more  than it saved by borrowing abroad, that is, by running a current account  deficit. However, a portion of the income generated by foreign-owned  assets in the United States must be paid to foreign lenders. National saving  is the only way a country can have its capital and own it too.
The persistent U.S. current account deficits of recent years have translated  into a rising level of indebtedness to other countries. However, many other  nations currently financing investment in the United States also will face  aging populations and declining national saving, so relying on foreign  savings to finance a large share of U.S. domestic investment or federal  borrowing is not a viable strategy for the long run.
The foregoing suggests that changing economic trends and related forces  will have important implications for federal policies and activities, as  illustrated by the following questions:  Immigration and workforce—How can the United States balance  immigration policies, such as worker and student visa programs, to   address the need for workers with technical skills and the nation’s need  to maintain global preeminence in higher education, science and  emerging homeland security requirements?
Research and development—Are different kinds of federal incentives  needed to encourage greater private sector collaboration and nurture  interdisciplinary research and development? For example, to what  extent does the current research tax credit actually stimulate private  sector research spending that would not have occurred otherwise?
Transportation—Do  the existing tools and delivery mechanisms, such  as existing trust funds dedicated to certain modes of transportation,  have the ability to provide intermodal, efficient, cost-effective solutions  to mobility and security challenges?
Land use planning—Can alternative federal approaches to  transportation, land management and water policies be adjusted to  better promote sustainable management of our nation’s land and water  resources? For example, given projected water supply shortages, is  there a need to reassess the balance between urban expansion in water- scarce regions and the continuance of existing crop irrigation practices?
Personal savings—Could the myriad savings incentives (for example,  IRA’s, health savings accounts, education savings incentives, etc.) that  complicate the current tax system be consolidated and simplified while  promoting increased savings?
section_title: Changing Security Threats
paragraphs: The United States is militarily unchallenged and probably will be for the  foreseeable future. Since the demise of the Soviet Union and the end of the  Cold War, the United States has emerged as the dominant military, political  and economic power in the world. Yet in the past 15 years, the world has  experienced dramatic changes in the overall security environment. The  focus has shifted from conventional threats posed during the Cold War era  to more unconventional and asymmetric threats which take advantage of  the individual freedoms we enjoy, as evidenced in the events of   September 11, 2001.
In response to these changing threats, the Congress has taken a number of  steps including (1) increased funding for the Department of Defense (DOD)  (See fig. 8.), (2) created the Department of Homeland Security (DHS),   (3) provided increased funding for DHS and other federal agencies  responsible for domestic homeland security, notably for border and  transportation security, and (4) restructured intelligence activities. The  Congress faces the difficult task of integrating and balancing fighting  terrorism abroad and meeting the requirements for homeland security with  other domestic priorities all the while protecting American liberties.
While DOD has taken steps to meet short term operational needs, it still  faces the fundamental challenge of determining how it will meet the longer  term concerns of reorganizing its forces and identifying the capabilities it  will need to protect the country from current, emerging, and future  conventional and unconventional security threats. As DOD seeks to meet  the demands of the new security environment, it continues to bear the  costs of the past by maintaining or continuing to pursue many of the  programs and practices from the Cold War era. Moreover, DOD faces  serious and long-standing challenges in managing its ongoing business  operations. Complicating its efforts are numerous systems problems and a  range of other long-standing weaknesses in the key business areas of  strategic planning and budgeting, human capital management,  infrastructure, supply chain management, financial management,  information technology, weapon systems acquisition, and contracting. In  fact, DOD alone has 8 of the 25 items and shares in the 6 cross-cutting ones  on our recently-issued high-risk list.
Concerns about the affordability and sustainability of the rate of growth in  defense spending will likely prompt decision makers to reexamine  fundamental aspects of the nation’s security programs, such as how DOD  plans and budgets; organizes, manages, and positions its forces; acquires  new capabilities; and considers alternatives to past approaches. To  successfully carry out this reexamination, DOD must overcome cultural  resistance to change and the inertia of various organizations, policies, and  practices that became well rooted in the Cold War era.
The threat of terrorism will persist well into the 21st century. Terrorists are  dispersed in loosely organized, self-financed, international networks, some  of which are cross-national. Domestic terrorist groups remain a security  threat, though currently to a much lesser extent than the international  terrorist movement. We must fundamentally reexamine our approaches to  terrorism and homeland security—the nature of the terrorist threat, its  long-term impact, and the impact of our strategies. While most believe we  are safer than we were on the day of the September 11 attacks, we still are  not safe. As the Gilmore and 9/11 Commissions pointed out, the nation will  never be completely safe and total security is an unachievable goal.
To adapt national strategies to address current and future threats to  homeland security, it will be imperative to define an acceptable, achievable,  and affordable level of risk. Security risks have been exposed in many  aspects of normal life, with perhaps many of the greatest dangers posed in  areas that Americans have simply taken for granted, such as air and water  supplies, food production chains, information systems, airports and train  stations, ports, borders, and shopping malls. However, we cannot afford to  protect everything against all threats—choices must be made about  protection priorities given the risk and how to best allocate available  resources. While risk-based allocation decision making is still evolving, we  must take a more systematic, reasonable and responsible approach to  allocating resources.
Another crucial challenge to addressing security risks across the nation is  establishing effective federal, state, and local government; private sector;  nongovernmental; and nation-state partnerships. The Constitution requires  the federal government to “provide for the common defense” and to “repel  invasions.” Many would interpret those requirements to justify homeland  security and related counterterrorism activities as an inherently  governmental obligation. However, the vast majority of the targets that  require protection are those owned by the private sector—critical  infrastructure such as water and power sources and information systems.  In addition, many of the emergency response and recovery capabilities are  those with nonfederal or not-for-profit entities, such as public health  facilities. Thus homeland security can only be accomplished through  recognizing the interdependencies of federal, state, local, and private  sector partners and the careful planning and integration of the roles and  responsibilities of federal and nonfederal partners. For example,  emergency response to a terrorist attack involving chemical or biological  weapons will require effective coordination between federal, state, and  local law enforcement agencies; other first responders; as well as public  health agencies, affected hospitals, and laboratories. The challenge for the  federal government is to design, select, and manage the various tools to  encourage cost-effective integration to fully leverage scarce resources. For  example, ensuring that critical information is shared, analyzed, integrated,  and disseminated can help prevent or minimize terrorist activities.
The following questions illustrate the kinds of issues that we will face as  the nation adapts to the changing threats to our national and homeland  security.
Defense resource allocation—How should the historical allocation of  resources across services and programs be changed to reflect the  results of a forward-looking comprehensive threat/risk assessment as  part of DOD’s capabilities-based approach to determining defense  needs?
Defense support services—What kinds of economies of scale and  improvements in delivery of support services would result from  combining, realigning, or otherwise changing selected support functions  (e.g., combat support, training, logistics, procurement, infrastructure, or  health care delivery)?
Homeland security risk—What is an acceptable level of risk to guide  homeland security strategies and funding?
Critical infrastructure—Are existing incentives and initiatives  sufficient to support private sector protection of critical infrastructure  they own, and what changes might be necessary?  What cybersecurity  technology can be applied to protect critical infrastructure from attack?
Information sharing—How can intelligence and information on  threats be shared with other levels of government and other critical  entities, yet be held secure?
section_title: Governance Challenges
paragraphs: The government’s capacity to address these trends and challenges is, itself,  a 21st century challenge. The capacity of the system to address the  emerging issues identified in these themes is predicated on a policymaking  and management process that has sufficient foresight, information,  integration, and management capacity to fully consider and act on  emerging trends.
In part this is a question of time horizons. Policy action, or inaction, has  implications far beyond today. How can policymaking institutions develop  the capacity to consider the implications of actions or inaction for current  as well as future generations? A longer-term perspective may be essential  to keeping ahead of the “crisis curve,” but it can also offer other benefits. If  the time horizon for policy debates recognized longer-term forces, it would  be easier for leaders to make the case for change to the broader public  since it permits changes to be phased in over many years.
Whether it be future labor force trends or long-term health care costs,  policymakers will need far better performance and cost information as they  take on such broad-ranging issues. To continue to be a leading democracy  in the information age may very well mean producing unique public  sources of objective, independent, scientifically grounded, and widely  shared quality information so that we know where the United States stands  now and what the trends are on both absolute and relative bases— including comparisons with other nations. By ensuring that the best facts  are made more accessible and usable by the many different members of our  society, we increase the probability of well-framed questions and debates  along with effective solutions. The stakes are high, including  considerations regarding allocating scarce public resources, strengthening  the economy, creating jobs, stimulating future industries, enhancing  security, promoting safety, protecting privacy, strengthening our  competitive edge, and sustaining the environment.
Addressing newly emergent issues and transformational change calls for a  policy process that can look at broader issues across the narrow confines  of individual programs, agencies, and tools. Many emerging issues are  cross-cutting in nature and the policy process will have to be  comprehensive enough to address these new tradeoffs. However, federal  programs remain highly fragmented, reflecting a policymaking process that  is overly stovepiped by agency and program, with insufficient focus on how  individual programs contribute to overarching, crosscutting goals and  missions. Although these individual programs address common or similar  performance goals, they result in an overly fragmented delivery network  and at times work at cross purposes. For example, federal food safety  programs are carried out by 12 agencies with differing enforcement criteria  and inspection practices. The Government Performance and Results Act  (GPRA) provided for a governmentwide performance plan to address these  crosscutting issues, but this plan has not yet been developed by the  executive branch.
Many emerging problems span boundaries to involve federal, state, and  local governments as well as private for profit and nonprofit entities.  Whether it be homeland security or health care delivery, federal agencies  and programs are increasingly reliant on coalitions of third-party providers,  such as states, to address challenges. Moreover, such coalitions  increasingly span national boundaries as many problems and issues are  framed by international treaties and multilateral organizations. Often, a  national, rather than strictly federal, solution is necessary requiring  partnerships and concerted effort across sectors. Notwithstanding this  increasing interdependence, major tensions exist as each actor in the  network makes decisions with insufficient dialogue with program partners.
The foregoing suggests that public management systems and networks will  have to undergo fundamental changes to respond effectively to the  daunting challenges facing us. This calls for nothing less than a  transformation in the people, processes, and technology used to address  public goals and objectives. While some agencies are making major strides  to transform their operations, in many cases the government is still trying  to do business in ways that are based on conditions, priorities, and  approaches that existed decades ago and are not well suited to addressing  21st century challenges.
For example, in many cases the government has not transformed how it  motivates and compensates its employees to achieve maximum results  within available resources and existing authorities. Even though people are  critical to any agency’s successful transformation, define its culture,  develop its knowledge, and are its most important asset, a number of  agencies still try to manage their people through an outmoded system that  (1) rewards length of service rather than individual skills, knowledge and  performance; (2) automatically provides across-the-board annual pay  increases, even to poor performers; and (3) compensates employees living  in various localities without adequately considering the local labor market  rates for these employees. To address these problems and provide the  services the public expects, the federal civil service system must be  reformed governmentwide, and this reform must be guided by a set of  consistent principles, criteria, and practices.
Another example is the outmoded physical footprint of agencies, which  reflects the failure to take advantage of opportunities provided by new  technology and transportation to modernize operations. More than 30  federal agencies control about $328 billion in real property assets  worldwide, and maintain a “brick and mortar” buildings and/or office  presence in 11 regions across the nation. But this organization and  infrastructure reflects a business model and the technological and  transportation environment of the 1950s. Many of these assets and  organizational structures are no longer needed; others are not effectively  aligned with, or responsive to, agencies’ changing missions; and many  others are in an alarming state of deterioration, potentially costing  taxpayers tens of billions of dollars to restore and repair. The Congress and  several agencies have recognized and begun to address this issue, but this  financial liability still looms.
The following questions illustrate the kinds of issues that we will face in  better aligning our governance system with the emerging challenges posed  by broad sweeping changes:  National performance indicators—Is the federal government  effectively informed by a key national indicator system about the  position and progress of the nation as a whole—both on absolute and  relative bases compared to other nations—as a guide to helping set  federal agency and program goals and priorities?
Crosscutting program integration—How can agencies partner or  integrate their activities in new ways, especially with each other? For  example, how can the myriad federal food safety programs managed  across several federal agencies be consolidated to better promote safety  and the integrity of the nation’s food supply?
Improving partnerships—What mechanisms might usefully bring  together leaders across governments to address joint problems, perhaps  through establishing commissions or other vehicles for promoting  dialogue and action?
Federal human capital reform—How should the federal government  update its classification and compensation systems to be more flexible,  market-based and performance-oriented while at the same time  incorporating safeguards to help ensure consistency and equity and  prevent abuse of employees?
Modernizing the federal footprint—In a modern society with  advanced telecommunications and electronic information capabilities,  does the government still need 11 regions? What opportunities exist to  more strategically manage the federal government’s real property assets,  such as disposing of excess federal facilities to make the federal  portfolio more relevant to current missions and less costly?
Transformational leadership—Should we create chief operating  officer or chief management officer positions with term appointments  within selected agencies to elevate, integrate, and institutionalize  responsibility and authority for business management and related  transformation efforts?
section_title: Where Do We Go From Here?
paragraphs: We recognize that the process of reexamining the base of government will  not be a simple or easy process—there are no “quick fixes.”  Such a process  reverses the focus that occurs in incremental reviews, where  disproportionate scrutiny is given to proposals for new programs or  activities but little or no scrutiny is given to those that are already in the  base. Taking a hard look at existing programs and carefully reconsidering  their goals and their financing is a challenging task. Reforming programs  and activities leads to winners and losers. Given prior experience and  political tendencies, there is little real “low-hanging fruit.”
The size of the fiscal challenge and the significance of the societal and  economic changes worldwide means  this kind of examination and  the  hard choices necessary to restore a sustainable fiscal path and modernize  government  may take a generation to address. Our history suggests that all  major spending and revenue programs and policies need to be subject to  periodic reviews; exempting major areas can undermine the credibility and  support for the entire process.
Beginning the reexamination and review process now would enable  decision makers to be more strategic and selective in choosing areas for  review over a period of years. Reexamining selected parts of the budget  base over time rather than all at once will lengthen the process, but it may  also make the process more feasible and less burdensome for decision  makers. And by phasing in changes to programs or policies that might  otherwise have prohibitively high transition costs, the impact can be  spread out over longer time periods. After all, our country, children, and  grandchildren are counting on us to be both prudent today and effective  stewards for tomorrow. We should not be satisfied with anything less.
Although reexamination is never easy, the effort is not without precedent.  The federal government, in fact, has reexamined some of its programs and  priorities episodically in the past. Programmatic reexaminations have  included, for example, the 1983 Social Security reform, the 1986 tax reform,  and the 1996 welfare reform. They have also included reforms such as the  creation of the Department of Homeland Security and, most recently, the  ongoing reorganization of the U.S. intelligence community, as this  Committee knows so well. From a broader fiscal standpoint, the 1990s  featured significant deficit-reduction measures adopted by the Congress  and supported by the President that made important changes to  discretionary spending, entitlement program growth, and revenues that  helped eliminate deficits and bring about budgetary surpluses. States and  other nations also have engaged in comprehensive reexamination  exercises.
In our system, a successful reexamination process will in all likelihood rely  on multiple approaches over a period of years. The reauthorization,  appropriations, oversight, and budget processes have all been used to  review existing programs and policies. Adding other specific approaches  and processes—such as temporary commissions or executive  reorganizations to develop policy alternatives—has been proposed. We  would suggest that there is no single approach or institutional reform that  can address the myriad of questions and program areas that need to be  revisited.
Fortunately, GPRA and other results-oriented management laws enacted  over the last 12 years have built a base of performance information that can  assist the Congress and the President in this effort. In the last few years,  OMB has been working to rate the effectiveness of programs under the  program assessment rating tool (PART). There are also many  nongovernmental sources of program evaluation and analysis. And, finally,  the Congress has its own analytic support—your staff and that of the  congressional support agencies, including GAO. As always, GAO stands  ready to assist the Congress as it develops its agenda and to help answer  any of the questions the Congress wishes to pursue.
We hope that this new report will be used by various congressional  committees as they consider which areas of government need particular  attention and reconsideration, recognizing that while answers to these  questions may draw on the work of GAO and others, only elected officials  can and should decide whether, how, and when to move forward.
Chairman Collins, Senator Lieberman, and Members of the Committee this  concludes my testimony. I would be happy to answer any questions you  may have.
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