Spring 2012 Update: The Federal Government's Long-Term Fiscal Outlook
April 2, 2012
Federal deficits and debt have reached historic highs in recent years. Congress has taken action to address the fiscal imbalance, but longer-term challenges remain. The Budget Control Act (BCA) of 2011 limits spending over the next decade and leads to an improved fiscal outlook. The act targets discretionary spending, and under both of GAO's simulations, discretionary spending as a share of the economy would be lower in 2022 than at any point in the last 50 years. Further, as the economy recovers, revenue increases and spending decreases. While the BCA improved the outlook, it did not eliminate the longer-term challenge, in part because it did not focus on the fundamental drivers of the government's future fiscal imbalances—a structural gap between revenues and spending driven by rising health care costs and demographics. As our 2011 simulations showed, if the Patient Protection and Affordable Care Act (PPACA) is implemented as intended it would have a major effect on the gap but would not eliminate it. The aging of the population and rising health care costs will continue putting upward pressure on spending. Assuming revenue in the long term returns to the 40-year historical average and remains stable at that share of GDP, the imbalance between spending and revenues increases, resulting in increasing levels of debt held by the public. A continuing increase in debt as a share of GDP means the federal government is on an unsustainable long-term fiscal path and underscores the need for policymakers to act to change the path.