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.3 The projections are therefore neither forecasts nor predictions. If policy changes are enacted, then actual financial outcomes will of course be different than those projected.4
The primary deficit – the difference between non-interest spending and receipts – is the only determinant of the ratio of debt held by the public to GDP that the Government controls directly. (The other determinants are interest rates and growth in GDP). Chart 7 shows 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 2009 and stayed large in 2010 and 2011due to the financial crisis and the recession, and the policies pursued to combat both. The primary deficit-to-GDP ratio is projected to fall rapidly between 2012 and 2019 (turning to surplus in 2015) as spending reductions called for in the Budget Control Act (BCA) of 2011 take effect and the economy recovers. Between 2019 and 2035, increased spending for Social Security and health programs due to continued aging of the population is expected to cause the primary balance to steadily deteriorate. A primary deficit is expected to reappear in 2025 that reaches 1.3 percent of GDP in 2035. After 2035, the projected primary deficit-to-GDP ratio slowly declines as the impact of the baby boom generation retiring dissipates. Between 2035 and 2086, the projected primary deficit averages 0.9 percent of GDP.
The revenue share of GDP fell substantially in 2009 and 2010 and increased only modestly in 2011 because of the recession and tax reductions enacted as part of ARRA and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 , and is projected to return to near its long-run average as the economy recovers and these temporary 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 more taxpayers and a larger share of income to fall into higher individual income tax brackets. These projections assume that Congress and the President will continue to enact legislation to prevent the share of income subject to the Alternative Minimum Tax from rising.
The non-interest spending share of GDP is projected to fall from its current level of 22.6 percent to about 20 percent in 2013, to stay at or below that level until 2026, and then to rise gradually and plateau at about 22 percent beginning in about 2040. The reduction in the non-interest spending share of GDP over the next two years is mostly due to caps on discretionary spending and further automatic spending cuts enacted in the BCA, and the subsequent increase is principally due to growth in Medicare, Medicaid, and Social Security spending.5 The retirement of the baby boom generations over the next 25 years is projected to increase the Social Security, Medicare, and Medicaid spending shares of GDP by about 1.4 percentage points, 1.3 percentage points, and 1.0 percentage points, respectively. After 2035, the Social Security spending share of GDP is relatively steady, while the Medicare and Medicaid spending share of GDP continues to increase, albeit at a slower rate, due to projected increases in health care costs. The Affordable Care Act (ACA) significantly reduces projected Medicare and Medicaid cost growth from the levels projected in the 2009 Financial Report. However, there is uncertainty about whether the projected cost savings, productivity improvements, and reductions in physician payment rates will be sustained in a manner consistent with the projected cost growth over time.
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 68 percent at the end of fiscal year 2011, and under current policy is projected to exceed 76 percent in 2022, 125 percent in 2042, and 287 percent in 2086. The continuous rise of the debt-to-GDP ratio illustrates that current policy is unsustainable.
This year's projections are somewhat more favorable than were the projections in the 2010 Financial Report. Last year's report projected the debt-to-GDP ratio to reach 352 percent in 2085, which compares with 283 percent projected in this year's report. The more favorable outlook is mainly due to spending reductions called for in the Budget Control Act of 2011 that are partly offset by somewhat less favorable economic and technical assumptions.
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 1.1 percent of GDP. This compares with an average primary deficit of 0.7 percent of GDP under current policy. The difference, the "75-year fiscal gap," is 1.8 percent of GDP, which is about 9 percent of the 75-year present value of projected receipts and of non-interest spending.
Closing the 75-year fiscal gap requires some combination of expenditure reductions and revenue increases that amount to 1.8 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 60 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 potentially significant steps towards fiscal sustainability by enacting the ACA in 2010 and the BCA in 2011. The ACA holds the prospect of lowering the long-term growth trend for Medicare and Medicaid spending, and the BCA significantly curtails discretionary spending. Together, these two laws substantially reduce the estimated long-term fiscal gap. But even with the new law, the debt-to-GDP ratio is projected to increase 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 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.
3 Current policy in the projections is based on current law, but includes extension of certain policies that expire under current law but are routinely extended or otherwise expected to continue, such as extension of relief from the Alternative Minimum Tax (AMT).(Back to Content)
5The 2011 Medicare Trustees Report projects that, assuming full implementation of ACA provisions, the Hospital Insurance (HI) Trust Fund will remain solvent until 2024 under current law – five years earlier than was projected in the 2010 Trustees Report. The projected share of scheduled benefits that can be paid from trust fund income is 90 percent in 2024, declines to about 76 percent in 2050, and then increases to 88 percent by 2085. As for Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds are projected to be exhausted in 2036, at which time the projected share of scheduled benefits payable from trust fund income is 77 percent, declining to 74 percent in 2085. More information is available at http://www.ssa.gov/oact/trsum/index.html.(Back to Content)
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