The General Accountability Office (GAO) this week updated its analysis of the federal government’s long-term fiscal path.  According to GAO’s report, the long-term fiscal outlook has improved since its last report, primarily due to enactment of the Budget Control Act of 2011.  The Act caps discretionary spending for the next 10 years, thus reducing projected budget deficits by $2.1 trillion.  However, GAO warned that this progress will not be sustained unless Congress and the administration make “difficult decisions affecting both federal spending and revenue.”

GAO’s analysis, first published in 1992, evaluates the results of long-term fiscal simulations, based on GAO assumptions.  These analyses are intended to provide context for decisionmakers who are considering policy options. 

GAO develops two simulations to show the effects on the trend of federal deficits and debt levels under two assumptions.  These simulations draw a stark contrast between the effects, over the long term, of different policy approaches. 

One simulation extends the Congressional Budget Office (CBO) 10-year baseline and then assumes that revenue and spending (except for large entitlements programs) will remain constant as a percentage of GDP. 

An alternative simulation allows federal spending to follow the CBO baseline for the first 10 years and does not reduce Medicare physician payments.  This simulation extends until 2021 all tax provisions, other than the temporary reduction in the Social Security payroll tax, indexes the alternative minimum tax (AMT) to inflation through 2021, and after 2021 brings revenues back to their historical level.

The results of GAO’s two simulations show the sensitivity of the deficit and the debt level to different policy assumptions about revenue growth and spending controls.  The debt level rises much more rapidly under the Alternative simulation than under the CBO Baseline Extended simulation.  This is due in large part because tax cuts are extended in the alternative, producing lower revenue, and Health care costs grow more rapidly.  Under the alternative simulation, reductions to Medicare physician rates do not occur and mechanisms employed to contain the growth in health care costs are not considered sustainable.