According to the 2010 Financial Report of the U.S. Government, released on December 21 by the Treasury Department, “under current policies and the assumptions used in this report the debt-to-GDP ratio will continually increase over the next 75 years and beyond, which means current policies are not sustainable.”
The report further warns, “the longer policy action to avert these trends is delayed, the larger the projected revenue increases and/or spending decreases necessary to reach a target debt-to-GDP ratio.”
These conclusions were contained in a new section of the annual Financial Report titled ”Statement of Long Term Fiscal Projections.” In assessing the present value of projected non-interest spending and revenues over the next 75 years, the report estimates an average gap of 1.9 percent of GDP. Persistent deficits of this magnitude would cause the debt-to-GDP ratio to steadily rise from 62 percent of GDP in 2010 to 130 percent in 2040, and to 350 percent by 2085. Interest on the debt would climb from 1.4 percent of GDP in 2010 to 19 percent by 2085.
Stabilizing the debt-to-GDP ratio at its current level, which is high by historic standards, would require average primary surpluses (i.e., non-interest spending over revenues) of 0.5 percent of GDP over the 75-year time frame. This would require policy changes amounting to 2.4 percent of GDP on average. Delaying action by 10 years would boost that figure to 2.9 percent of GDP.
More alarming is that the projections used in the Financial Report are far from a worst-case scenario. For example, the long-term Medicare projections are based on the most recent projections of the Medicare trustees, which assume that major cost-savings provisions in the 2010 Affordable Care Act (ACA) will be effective over the next 75 years. The projections also assume that a 30 percent cut in Medicare physician reimbursements will occur as scheduled over the next three years.
However, as explained in the report, “Many experts doubt the feasibility of such sustained improvements and anticipate that over time the Medicare price constraints [enacted in the ACA] would become unworkable and that Congress would likely override them, much as they have done to prevent the reductions in physician payment rates otherwise required by the sustainable growth rate formula in current law.”
In addition, the report notes that the sustainability projections “likely understate the cost of delay because they do not assume interest rates will rise as the debt-to-GDP ratio grows.” Heavy government borrowing, however, would put upward pressure on interest rates. If they were to grow along with the debt, the report warns, it could lead to “the point where there may be no feasible level of taxes and spending that would reduce the debt-to-GDP ratio to its 2010 level.”
In a statement accompanying the Financial Report, Comptroller General of the United States Gene L. Dodaro cited “material weaknesses in internal control over financial reporting and other limitations” that prevented GAO from “expressing an opinion on the fiscal year 2009 and 2010 accrual-based financial statements.”
As has been the case in past reports, much of this problem was concentrated in the Departments of Defense and Homeland Security.
Dodaro also noted that “Because of significant uncertainties….we [GAO] are unable to, and do not, express an opinion on the 2010 Statement of Social Insurance,” which primarily deals with the outlook for Social Security and Medicare. This is a change from the past three Financial Reports. It stems from uncertainties about the effectiveness of the Medicare cost-saving provisions in the ACA discussed above.
As explained in the report, “A disclaimer of opinion indicates that sufficient information was not available for the auditors to determine whether the reported financial statements were fairly presented.”
Summing up, Dodaro stated, “While the economy is still fragile and in need of careful attention, there is wide agreement on the need to look not only at the near term but also at steps that begin to change the long-term fiscal path as soon as possible without slowing the economy.”