An important purpose of the Financial Report is to help citizens and policymakers assess whether current fiscal policy is sustainable and, if it is not, the urgency and magnitude of policy reforms necessary to make it sustainable. A sustainable policy is one where the ratio of debt held by the public to GDP (the debt to GDP ratio) is stable in the long run. Sustainability concerns only whether long-run revenues and expenditures are in balance; it does not concern fairness or efficiency implications of the reforms necessary to achieve sustainability.
To determine if current fiscal policies are sustainable, the projections in this report assume current policies will be sustained indefinitely and draw out the implications for the growth of public debt as a share of GDP. The projections are therefore neither forecasts nor predictions. If policy changes are enacted, perhaps in response to projections like those presented here, then the projections will of course prove to be untrue.
The primary deficit – the difference between non-interest spending and receipts – is the only determinant of the ratio of public debt to GDP that the Government controls directly. (The other determinants are interest rates and growth in GDP). Chart 2 on page iii and Chart 7 both show receipts, non-interest spending, and the difference – the primary deficit – expressed as a share of GDP. The primary deficit-to-GDP ratio grew rapidly in 2008 and 2009 due to the financial crisis and the recession, and the policies pursued to combat both, and is projected to fall rapidly to near zero in the next few years as the economy recovers. After 2020, the primary deficit-to-GDP ratio is projected to increase, reaching 2 percent in 2030 and remaining at or above 1.8 percent through the end of the 75-year projection period and beyond.
The revenue share of GDP fell substantially in 2009 and 2010 because of the recession and tax reductions enacted as part of the Recovery Act and is projected to return to near its long-run average as the economy recovers and the Recovery Act tax cuts expire. After the economy is fully recovered, receipts are projected to grow slightly more rapidly than GDP as increases in real incomes cause a larger share of income to fall into higher individual income tax brackets.
The projected increase in non-interest spending as a percent of GDP is principally due to growth in spending for Medicare, Medicaid, and Social Security.3 Between 2017 when the projected primary deficit is about zero and 2035 when the non-interest spending share of GDP plateaus, these expenditure categories account for essentially all of the increase in the ratio of non-interest spending to GDP. These spending increases reflect rapid aging of the population as the baby boom generations retire, as well as rising health care costs. After 2035, it is projected that continued increases in longevity will cause the population to become still older, but at a very gradual pace.
The primary deficit projections in Chart 7, along with those for interest rates and GDP, determine the projections for the ratio of debt held by the public to GDP that are shown in Chart 8. That ratio was 62 percent at the end of fiscal year 2010, and under current policy is projected to exceed 70 percent in 2020, 130 percent in 2040, and 350 percent in 2085. Continued aging of the population due to increasing longevity will place upward pressure on the debt-to-GDP ratio beyond 75 years if there is no change in policy.
Chart 8 also shows the 2009 Financial Report projection of debt held by the public as a percent of GDP. The 2010 projection is lower than the 2009 projection in every year of the projection period almost entirely as a result of the Affordable Care Act (ACA), which is projected to significantly lower Medicare spending and raise receipts. As discussed in the Financial Report, there is uncertainty about whether the projected cost reductions in health care cost growth will be fully achieved.
It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require running primary surpluses over the period that average 0.5 percent of GDP. This compares with an average primary deficit of 1.9 percent of GDP under current policy. The difference, the “75-year fiscal gap,” is 2.4 percent of GDP.
Closing the ,75-year fiscal gap requires some combination of expenditure reductions and revenue increases that amount to 2.4 percent of GDP on average over the next 75 years. The timing of such changes has important implications for the well-being of future generations. For example, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap is 50 percent larger if reforms are concentrated into the last 55 years of the 75-year period than if they are spread over the entire 75 years.
The United States took a potentially significant step towards fiscal sustainability in 2010 by enacting the ACA. The legislated changes for Medicare, Medicaid, and other parts of the health care system hold the prospect of lowering the long-term growth trend for health care costs and significantly reducing the long-term fiscal gap. But even with the new law, the debt-to-GDP ratio is projected to increase continually over the next 75 years and beyond if current policies are kept in place, which means current policies are not sustainable. Subject to the important caveat that policy changes not be so abrupt that they slow the economy’s recovery, the sooner policies are put in place to avert these trends, the smaller are the revenue increases and/or spending decreases necessary to return the Nation to a sustainable fiscal path.
While this Report’s projections of expenditures and receipts under current policies are highly uncertain, there is little question that current policies cannot be sustained indefinitely.
3The 2010 Medicare Trustees Report projects that, with enactment of the Affordable Care Act (ACA), the Hospital Insurance (HI) Trust Fund will remain solvent until 2029 under current law – 12 years longer than was projected in the 2009 Trustees Report. The projected share of scheduled benefits that can be paid from trust fund income is 85 percent in 2029, declines to about 77 percent in 2050, and then increases to 89 percent in 2084. The Social Security Trust Funds also face a long-run shortfall. Under current law, the OASDI Trust Funds are projected to be exhausted in 2037 and the projected share of scheduled benefits payable from trust fund income is 78 percent in 2037 and 75 percent in 2084. There is uncertainty about whether the projected reductions in health care cost growth, based on current law, will be fully achieved.. (Back to Content)