The nation’s fiscal health: information on spending and income implications of potential debt targets
What GAO found
The COVID-19 pandemic required significant federal spending to respond to the national public health emergency and the resulting economic turmoil. This response and the severe economic contraction of the pandemic have led to an increase in federal debt. Once the COVID-19 pandemic subsides and the economy has recovered significantly, Congress and the administration will face the federal government’s fiscal challenges. To help change the long-term fiscal path, in September 2020, GAO recommended that Congress consider establishing a long-term fiscal plan that includes fiscal rules and targets, such as a debt-to-debt ratio target. gross domestic product (GDP).
In this report, GAO analyzed the changes in spending and income needed to meet six potential debt-to-GDP ratio targets at the end of a 30-year period (2020-2049). To achieve one of the goals, policymakers will need to reduce program spending, increase income, or, most likely, a combination of both (see table).
Illustrative examples of changes needed to meet debt-to-GDP ratio targets
|Debt target, as a percentage of GDP (end of 30 years)||Expenses and revenues: total change over 30 years||Program spending only: immediate and permanent decrease in projected annual program spending requireda||Income only: Immediate and permanent increase needed in projected annual income|
|0 (pay off all debts)||65.9||35.7||48.1|
Source: GAO simulation. | GAO-21-211.
Note: The simulation used for this analysis generally reflects historical trends, such as the extension of tax provisions that are scheduled to expire. It does not take into account the potential macroeconomic effects of changes in fiscal policy over time.
aProgram spending includes all spending except interest payments on debt held by the public.
When examining the changes in spending and income needed to meet various debt-to-GDP ratio targets, policymakers can also examine how assumptions about key variables, such as discretionary spending, income, and GDP, change. affect these budget results. For example, if GDP growth is higher than expected, policymakers might need to cut spending or increase income to meet a selected debt-to-GDP ratio target than would be needed based on GAO’s standard assumptions.
GAO has created an interactive web tool to accompany this report to allow users to enter different assumptions for each of these variables. This tool illustrates how these changes would affect different debt-to-GDP ratio targets over time, as well as the changes in spending and revenue needed to meet various targets. This tool is available at https://www.gao.gov/products/GAO-21-211.
Why GAO did this study
Even before the fiscal and economic effects resulting from COVID-19, an imbalance between federal revenues and expenditures that is built into current law and policy was contributing to growing federal debt. The Congressional Budget Office projects that by 2023, federal debt held by the public will reach 107% of GDP, its highest point in U.S. history. This situation, in which the federal debt is growing faster than the GDP, means that our country is on an unsustainable fiscal trajectory.
GAO has been tasked with examining issues related to fiscal rules and targets and the federal fiscal position. In response to this request, in September 2020, the GAO released a report (GAO-20-561) on key considerations for the design, implementation, and enforcement of fiscal rules and targets. This report complements this work and describes how changes in future spending and revenue assumptions affect the federal government’s projected financial position.
GAO updated its long-term simulations of federal revenues and expenditures to (1) analyze six potential debt-to-GDP ratio targets and (2) measure the fiscal gap – the policy change needed to meet a budget target. debt / GDP given from start to end of 30 years. GAO also analyzed how changes in key variables affected the debt-to-GDP ratio targets and the fiscal gap.
For more information, contact Jeff Arkin at (202) 512-6806 or [email protected]