The Nation's Long Term Fiscal Outlook - September 2008 Update

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 longterm effects of fiscal policy.

GAO runs two simulations

• “Baseline Extended” follows the Congressional Budget Office’s (CBO) September 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).
• The “Alternative” simulation is based on historical trends and recent 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, and all tax provisions are extended until 2018 and then revenues are brought back to about their historical level.

Our long-term simulations show that absent policy actions aimed at deficit reduction, the federal government faces unsustainable growth in debt. Such growth would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.