Over the long term, the imbalance between spending and revenue that is built into current law and policy is projected to lead to continued growth of the deficit and debt held by the public as a share of GDP. This situation— in which debt grows faster than GDP—means the current federal fiscal path is unsustainable. Projections from the 2016 Financial Report of the United States and the Congressional Budget Office (CBO), and simulations from GAO all show that, absent policy changes, the federal government’s fiscal path is unsustainable. According to the 2016 Financial Report, the federal deficit in fiscal year 2016 increased to $587 billion—up from $439 billion in fiscal year 2015. This marked a change from 6 years of declining deficits. The federal government’s receipts (taxes and other collections) increased by $18.0 billion (0.6 percent), from $3,248.7 billion to $3,266.7 billion, but that was outweighed by a $166.5 billion increase in spending from $3,687.6 billion to $3,854.1 billion. Spending increases in 2016 were driven by Social Security (the Old-Age and Survivors Insurance and Disability Insurance programs), Medicare, Medicaid, and interest on debt held by the public (net interest). Debt held by the public was 77 percent of GDP at the end of fiscal year 2016—an increase from 74 percent at the end of fiscal year 2015. Although the federal government has carried debt throughout virtually all of U.S. history, the 2016 Financial Report shows that the current fiscal position is unusual in the nation’s history and that debt as a share of the economy is the highest it has been since 1950. As shown in figure 1, debt as a share of GDP peaked as 106 percent just after World War II, but then fell rapidly. Since 1946 the debt-to-GDP ratio has averaged 44 percent. The long-term fiscal projections in the federal government’s 2016 Financial Report and those prepared annually by CBO and GAO each use somewhat different assumptions, but their results are the same: absent policy changes, the federal government’s fiscal path is unsustainable with debt held by the public as a share of GDP projected to grow continuously. Projections show that under current law it will grow to exceed the historical high of 106 percent in 15 to 25 years. (See figure 2.) Both the timing and pace of this growth depend on underlying assumptions made, especially about health care costs. Under GAO’s alternative simulation debt held by the public as a share of GDP would surpass its historical high of 106 percent by 2032. CBO’s extended baseline shows debt held by the public surpassing that level by 2035 and the 2016 Financial Report projections show debt held by the public surpassing 106 percent by 2041. Of further concern is the fact that none of these long-term projections include certain fiscal risks that create fiscal exposures that could affect the government’s financial condition in the future. Fiscal exposures are responsibilities, programs, and activities that may legally commit or create expectations for future federal spending based on current policy, past practices, or other factors. Some examples of such fiscal risks include: The Pension Benefit Guaranty Corporation’s (PBGC) financial future is uncertain because of long-term challenges related to PBGC’s governance and funding structure. PBGC’s liabilities exceeded its assets by over $79 billion as of the end of fiscal year 2016—an increase of over $3 billion from the end of fiscal year 2015 and of about $44 billion since 2013. PBGC reported that it is subject to potential further losses of $243 billion if plan terminations occur that are considered reasonably possible. The U.S. Postal Service (USPS) continues to be in a serious financial crisis as it has reached its borrowing limit of $15 billion and finished fiscal year 2016 with a reported net loss of $5.6 billion. USPS’s business model is not viable and cannot fund its current level of services, operations, and obligations. USPS’s liabilities exceeded its assets by $56 billion as of the end of fiscal year 2016 and USPS reported an additional $39.5 billion in unfunded liabilities at that time for its retiree health and pension funds. USPS reported a total unfunded liability for its retiree health and pension funds of $73.4 billion, $33.9 billion of which relates to required prefunding payments for postal retirees’ health benefits that have not been made and is included in the liabilities reported on its balance sheet. Some government insurance programs such as the National Flood Insurance Program do not have sufficient dedicated resources to cover expected costs. The Federal Emergency Management Agency (FEMA), which administers the National Flood Insurance Program, owed $24.6 billion as of March 2017 to the Department of the Treasury (Treasury) for money borrowed to pay claims and other expenses, including $1.6 billion borrowed following a series of floods in 2016. FEMA is unlikely to collect enough in premiums to repay this debt. Citizens also look to the federal government for assistance when crises happen and immediate federal action is expected. This can take the form of expectations for additional and large amounts of federal spending. These crises often cannot be predicted and are very difficult to budget for. According to the Congressional Research Service, the federal budget does contain some funds for disaster response through the Disaster Relief Fund; however, this fund often is insufficient to respond to the number and scope of natural disasters, and it is not typically used as a funding source for other types of unforeseen events such as wars, financial crises, cyberattacks, or health pandemics. The growing gap between revenues and spending reflects three main trends: significant growth in spending for retirement and healthcare programs, rising interest payments on the government’s debt, and modest growth in revenues. The size of the gap is such that both the spending and revenue side of the budget must be examined. The 2016 Financial Report’s long-term fiscal projections, CBO’s long-term projection, and GAO’s long-term simulations all show that the key drivers on the spending side are health care programs and interest on debt held by the public (net interest). Social security also poses significant financial challenges. Total health care spending (public and private) in the United States continues to grow faster than the economy. As figure 3 shows, growth in federal spending for health care programs has exceeded the growth of GDP historically and is projected to grow faster than the economy. These health care programs include Medicare, Medicaid, and the Children’s Health Insurance Program, along with federal subsidies for health insurance purchased through the marketplaces established by the Patient Protection and Affordable Care Act (ACA) and related spending. According to GAO’s alternative simulation, federal spending on major health care programs is projected to increase from $993 billion in fiscal year 2016 to $2 trillion in fiscal year 2045 in 2016 dollars. Growth in federal spending on health care is driven, in part, by increasing enrollment in federal health care programs, stemming from both the aging of the population and the expansion of federal programs. As many members of the baby-boom generation age and as life expectancy continues to generally increase, the number of people 65 or older is expected to rise by more than one-third, thereby increasing the number of Medicare beneficiaries. (See figure 4.) According to CBO, outlays for Medicaid in fiscal year 2016 rose by $18 billion (or 5.3 percent) compared with outlays in fiscal year 2015. The decision of more than half the states to expand eligibility for their Medicaid programs as provided by the ACA was the primary reasons for this growth. The growth in federal spending on health care can also be attributed to increases in health care spending per enrollee. Per beneficiary health care spending has historically risen faster than per capita economic output and is projected to do so in the future. While health care spending is a key programmatic and policy driver of the long-term outlook on the spending side of the budget, eventually, spending on net interest becomes the largest category of spending in both the 2016 Financial Report’s long-term fiscal projections and GAO’s simulations. Specifically, in GAO’s alternative simulation, net interest increases from $248 billion in fiscal year 2016 to $1.4 trillion in fiscal year 2045 in 2016 dollars. Growth in interest payments occurs for two main reasons: Growing debt: Even without any increase in interest rates, the cost of financing the debt grows as debt held by the public grows, resulting in greater interest payments than would otherwise exist with less debt. Spending on interest can absorb resources that could be used instead for other priorities. Growth in interest rates: In recent years interest rates on Treasury securities have remained low, lowering interest costs. However, CBO and others project those interest rates will rise in the long term, increasing the net interest costs on the debt. Marketable U.S. Treasury securities consist of bills, notes, and bonds. Treasury seeks to accomplish “lowest cost financing over time” in the way it manages debt issuance. Net interest costs will depend in part on the outstanding mix of Treasury securities. Treasury issues securities in a wide range of maturities to appeal to the broadest range of investors. Longer-term securities typically carry higher interest rates but offer the government the ability to “lock in” fixed interest payments over a longer period and reduce the amount of debt that Treasury needs to refinance in the short term. In contrast, shorter-term securities generally carry lower interest rates. They also play an important role in financial markets. For example, investors use Treasury bills to meet requirements to buy financial assets maturing in a year or less. However, shorter-term securities add uncertainty to the government’s interest costs and require Treasury to conduct more frequent auctions to refinance maturing debt.