Summary: Since 1992, GAO has published long-term fiscal simulations of what might happen to federal deficits and debt levels under varying policy assumptions. We developed our long-term model in response to a bipartisan request from Members of Congress who were concerned about the long-term effects of fiscal policy. More recently, GAO has also begun publishing separate long-term fiscal simulations for the state and local government sector. GAO runs two simulations: (1) "Baseline Extended" follows the Congressional Budget Office's (CBO) January 2010 baseline estimates for the first 10 years and then simply holds revenue and spending other than large entitlement programs constant as a share of gross domestic product (GDP); and (2) the "Alternative" simulation is based on historical trends and policy preferences. Discretionary spending grows with GDP rather than inflation during the first 10 years, Medicare physician payment rates are not reduced as in CBO's baseline, all tax provisions are extended to 2020, and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2020; revenues are then brought back to their historical level. This update incorporates CBO's most recent baseline projections that were released in January 2010.
The economic downturn and the federal government's response continue to shape the near-term budget outlook. In fiscal year 2009 the overall federal deficit reached 9.9 percent of GDP--the largest since 1945, and the deficit is expected to decline only slightly in 2010. While deficits are projected to decrease further as federal support for states and the financial sector wind down and the economy recovers, the increased debt and related interest costs will remain. Our long-term simulations show that absent policy changes the federal government faces an unsustainable growth in debt. Under our Alternative simulation, debt held by the public as a share of GDP could exceed the historical high reached in the aftermath of World War II by 2020--10 years sooner than our simulation showed just 2 years ago. Recent events have made the fiscal challenge greater. Although the economy is still fragile, there is wide agreement on the need to begin to change the long-term fiscal path as soon as possible without slowing the recovery because the magnitude of the changes needed grows with time. Congress recently enacted a return to statutory PAYGO and, in February, the President established a commission to identify policies to change the fiscal path and stabilize the debt-to-GDP ratio.
