The federal budget is on an unsustainable path as a result of projected federal debt levels that will continue to grow relative to the size of the economy. In recent years, federal debt has increased as a result of elevated budget deficits attributed to the economic downturn and the policies enacted to accelerate economic recovery. Under baseline assumptions, deficit levels are expected to fall towards the middle part of the decade, as the economy recovers, before rising again by the end of the decade. If these baseline assumptions are altered to more closely match actual policy, the deficit shows the same pattern with less improvement in the near term. Beyond this decade, however, the federal government's fiscal outlook becomes bleaker as spending on mandatory programs, such as Social Security, Medicare, and Medicaid, and net interest consume an increasing portion of the total federal budget resulting in very large increases in federal debt. Various views and opinions exist about how to change the long-term fiscal outlook, specifically concerned with which programs should be prioritized or sacrificed. Because known imbalances already exist between spending and revenue over the long term, delays in taking corrective action will exacerbate the size of changes needed to return to fiscal sustainability, with greater sacrifices facing programs and individuals when the imbalance is addressed. At the extreme, if no action is taken, the United States will likely face a significant economic crisis. This report provides an explanation of why the federal government's fiscal path is unsustainable, a brief overview of the short- and long-term outlook for the federal budget, and a discussion of the framework and tradeoffs in which to consider proposed policy options to make the budget sustainable. Finally, this report briefly discusses the proposals of selected groups that have published detailed recommendations on how to return the federal budget to a sustainable course. In recent years, the budget deficit, the difference between spending and revenues, has significantly exceeded economic growth. If the budget deficit exceeds economic growth for a sustained period, a variety of problems could result. These include a lower national saving rate, higher interest rates, and higher levels of inflation. Moreover, budget deficits add to the level of national debt, as additional borrowing is needed to finance the gap between spending and revenues. Doing nothing to combat the country's deficit and rising debt levels can lead to more severe problems over the long term, including the potential for the United States government to default on its obligations. As the debt grows, the nation relies on the willingness of investors to buy it. If investors lose confidence in the ability of the United States to bring its fiscal house under control, at some point they would no longer be willing to continue buying debt and financing the budget deficit except at very high interest rates. Consequently, the longer that policymakers wait to improve the fiscal outlook, the larger changes will likely have to be, the greater the risk of a lack of investor confidence, and the more likely the a risk of a severe financial crisis. Whether or not the federal budget is fiscally sustainable is generally measured by the annual changes in the ratio of debt held by the public-to-GDP (hereafter referred to as debt-to-GDP ratio). Budget deficits will generally increase the level of total federal debt. If the budget is in surplus, total federal debt will generally fall. Temporary increases in the debt-to-GDP ratio are not necessarily problematic. However, if the debt-to-GDP ratio is persistently rising, it is considered unsustainable. If GDP growth equals or exceeds the annual budget deficit as a percentage of GDP, meaning that the debt-to-GDP ratio would generally remain constant or fall, then the budget is considered sustainable. The issue of fiscal sustainability has gained prominence due to the significant increases in the debt-to-GDP ratio over the last several years as a result of the recession and financial crisis and the projected increases over the long term. In FY2007, the debt-to-GDP ratio stood at 36.2%. At the end of FY2010, the debt-to-GDP ratio stood at 62.1%, and is projected by the Congressional Budget Office (CBO) to rise to 87.4% by FY2021, under the President's proposed budget. While there is no level of debt-to-GDP that is universally regarded as optimal, some budget reform proposals recommended maintaining the debt-to-GDP ratio at 60% or less going forward. Two sets of policy issues currently affecting the size of the budget deficit and the federal debt: economic recovery and related policies in the short run and imbalances in retirement and healthcare programs in the long run. The economy is still recovering from the most recent recession, which lasted from December 2007 to June 2009. During this period, the federal budget deficit rose from 1.2% of GDP in FY2007 to 9.9% in FY2009. The budget deficit remained elevated at 8.9% of GDP in FY2010. Debt held by the public rose from 36.2% of GDP at the end of FY2007 to 62.1% of GDP at the end of FY2010. The budget deficit grew primarily for two reasons: 1) government actions taken to combat the economic downturn; and 2) significantly lower revenue and higher spending levels directly attributable to the economic conditions. Generally, as debt rises, the portion of the federal budget devoted to interest payments on it also rises, leaving fewer resources to finance other priorities. As federal debt continues to accumulate, interest payments are generally expected to rise especially as the economic recovery continues and interest rates increase. Even if the current level of federal debt were to remain stable, interest payments, or the cost of holding that debt, would still need to be made on the debt that has already been issued. Even at a stable level of debt, interest payments could still increase if maturing debt is refinanced at higher interest rates. In the short term, continued economic recovery will lead to decreases in the budget deficit relative to its current level. Revenues will automatically increase as unemployment falls and spending will automatically decrease due to less reliance on federal programs meant to provide assistance during economic downturns. The deficit is not projected to decline enough to stabilize the debt relative to GDP, however. Though many argue that fiscal stimulus and other actions were needed to help the economy recover, accumulated large budget deficits and resulting high debt levels will have an effect for many years. In the long run, the United States faces several major challenges. Most budget analysts agree that federal spending on healthcare is the largest contributor to the nation's long-term fiscal challenges. This is largely due to projections that the rapid growth in healthcare costs will continue in the future. In addition, benefits owed to future retirees under the Social Security program are growing out of balance with the revenue stream that finances the program. CBO projects that, under certain assumptions, federal spending on major health programs, Social Security, and net interest payments alone could exceed the revenues collected by the federal government in 2024. This scenario would mean that, without increasing revenues or altering spending patterns, federal outlays other than for these programs would need to be deficit financed. In other words, if policy were simply allowed to continue on its current path after the economy recovers, there could be a significant structural deficit that would be difficult to overcome without programmatic reforms. In the absence of changes to correct this future imbalance between spending and revenue, there would likely be negative effects on future living standards and the economy and an increased likelihood of a financial crisis. If current policy is maintained and long-run deficits remain high, interest rates on U.S. Treasury bonds would likely rise substantially, both as a result of the higher risk that the Treasury might ultimately default on the debt and as a result of the government's demand for borrowed funds. If the government financed its rising budget deficit by increasing the money supply, inflation and interest rates would also increase significantly. Higher interest rates, in turn, make investment more expensive, causing economic growth to slow and ultimately leading to lower U.S. living standards. CBO estimates that, by 2035, the deficits resulting from current policy would reduce GDP by 15% relative to what it would have been. Budget policy debates thus far in the 112 th Congress have centered on how to achieve meaningful deficit reduction and implementation of a plan to stabilize the federal debt. On April 5, 2011, Representative Paul Ryan, the Chairman of the House Budget Committee, released a report entitled "The Path to Prosperity: Restoring America's Promise," which provided a plan to stabilize the federal debt. Under the assumptions in Chairman Ryan's plan, the deficit would be reduced by $1,649 billion relative to the CBO current law baseline over the FY2012 and FY2021 period. If all of his proposals are implemented, fiscal sustainability would be achieved by roughly FY2030 with a declining debt-to-GDP ratio thereafter. Though no formal proposal has been introduced in the Senate, a group of six senators, known as the "Gang of Six", has been working on formulating a bipartisan deficit reduction proposal. This proposal is expected to be released in Spring 2011. On April 13, 2011, President Obama released a deficit reduction proposal that would include spending cuts and tax reform. The proposal also included a "debt failsafe" trigger that would require a debt-to-GDP ratio that is stabilized by FY2014 and declining thereafter. If this is not achieved, the trigger would automatically initiate across the board spending cuts and reductions in tax expenditures (i.e., broadening the tax base and raising revenue). The proposal also included the creation of a new bipartisan, bicameral group, led by Vice President Biden, to negotiate an agreement on a legislative framework for comprehensive deficit reduction. Budgets are a reflection of the nation's priorities and allocate limited resources. To achieve fiscal sustainability, cuts or reductions to favored programs and increases in taxes will likely be required.