3.1: Fiscal Gap
Analyze the Government’s Fiscal Position and Opportunities to Strengthen Approaches to Address the Current and Projected Fiscal
Gap
Other Information:
Weaknesses in the economy and financial markets—and the government’s responses to them—have contributed to near-term increases
in federal deficits, which reached record levels in fiscal year 2009. Yet, the federal government faces even larger fiscal
challenges that will persist long after the return of financial stability and economic growth. In the coming decades, the
nation’s fiscal outlook will be shaped largely by demographics and health care costs. As the baby-boom generation retires,
federal spending on retirement and health programs—Social Security, Medicare, and Medicaid—will grow dramatically. A range
of other federal fiscal commitments, some explicit and some representing implicit public expectations, also bind the nation’s
fiscal future. Without changes in policy, a growing imbalance between expected federal spending and tax revenues will mean
escalating and ultimately unsustainable federal deficits and debt. Long-term fiscal outlook: GAO’s simulations of the long-term
fiscal outlook show debt escalating and illustrate that the nation’s long-term fiscal outlook remains unsustainable. In barely
10 years, debt held by the public as a percentage of gross domestic product (GDP) could exceed the historical high reached
in the aftermath of World War II and grow at a steady rate thereafter. The large public debt that must be refinanced over
the coming 5 years also causes concern. The recent increase in federal debt takes place in the context of growing long-term
fiscal pressures that will further squeeze the resources available to finance government activities. Like the federal government,
state and local governments have faced and will continue to face fiscal challenges, which will be even more acute during periods
of higher unemployment, constrained revenue, and increased demands for services (see fig. 40). Moreover, as states and localities
seek to foster economic growth and fiscal sustainability within their jurisdictions, they are increasingly competing with
each other across a range of business, economic, and social dimensions to achieve policy goals. Public policy decisions would
benefit from a greater understanding of the tools used to compete, as well as the advantages and disadvantages of such competition.
Financial reporting and debt management: The federal government’s economic stimulus and recovery efforts have created new
and unprecedented federal financial reporting and debt management challenges. Accurate and timely financial information about
government spending, including how the American Recovery and Reinvestment Act (the Recovery Act) and other federal funds are
being used by states and localities, will help policymakers and the public assess and manage the country’s fiscal condition
and economic progress in the coming years. GAO’s planned work reflects significant developments, such as: The total cost of
loans, credit guarantees, „„and other assistance that the Treasury, Federal Reserve, or other government entities have committed
to date to address the financial crisis has been estimated in the trillions of dollars. In the near term, oversight is needed
to ensure that the government’s responses achieve its goals efficiently and effectively. The federal government is on an „„unsustainable
long-term fiscal path driven primarily by rising health care costs and known demographic trends. The Statement of Social Insurance,
for example, shows that the present value of projected scheduled benefits exceeds earmarked revenues for social insurance
programs (such as Social Security and Medicare) by about $46 trillion over the next 75 years. Other risks and uncertainties
may „„affect the federal government’s reported financial condition. For example, the federal government is allowing its funding
commitment to Fannie Mae and Freddie Mac to increase as necessary to accommodate any cumulative reduction in the net worth
of the two entities over the next 3 years. Notably, Fannie Mae and Freddie Mac together own or guarantee roughly half of the
$11.7 trillion in U.S. residential mortgage debt. „„GAO will also monitor high-risk areas of government operations vulnerable
to economic weakness, like the Pension Benefit Guaranty Corporation, whose government-insured insurance programs remain exposed
to the threat of terminations of large underfunded pension plans sponsored by financially weak firms. Pension plans of financially
weak firms are estimated to be underfunded by about $161 billion—a figure that may worsen if the economic recovery slows or
financial markets weaken. Annual financial statements: Of particular importance in the coming 5 years will be GAO’s unique
role in auditing the U.S. government’s annual consolidated financial statements, as well as those of the Federal Deposit Insurance
Corporation’s Deposit Insurance Fund, the Securities and Exchange Commission, the Internal Revenue Service (IRS), the Bureau
of Public Debt, the Federal Housing Finance Agency (with its responsibility for the supervision and oversight of Fannie Mae,
Freddie Mac, and the 12 federal home loan banks), and Treasury’s Office of Financial Stability (responsible for the Troubled
Asset Relief Program). For example, the financial crisis has expanded the federal government’s ownership of private-sector
firms, its purchase and guaranteeing of financial assets, and its insurance against financial losses. As a result, auditing
the government’s financial statements—and properly accounting for its assets and liabilities—will be complex. GAO will also
continue to work with other key federal agencies and their auditors to improve internal controls over financial reporting,
compliance with selected laws and regulations, and the usefulness and relevance of overall federal financial reporting. Performance
and program outcomes: As the administration and the Congress work to address fiscal imbalances, the effective monitoring,
measurement, and evaluation of performance and program outcomes will take on heightened importance, especially as strategic
decisions will have to be made about allocating scarce resources during the federal budget process. Forward-looking information
will be needed that helps assess the fiscal, economic, and social implications of possible changes to long-standing or entrenched
government programs and policies. Against a backdrop of uncertainty and rapid changes in the economy and nation’s fiscal condition,
GAO will work to recommend ways federal agencies can find opportunities and build a culture for effective risk management
in critical program areas, including financial regulation, health care, defense, and homeland security. Revenue: Dealing with
the longer-term fiscal challenge will also require examining the revenue side of the budget. Short-term revenue fluctuations
are normal and may be a countercyclical force. For example, during periods of economic strain and higher unemployment, without
changes in policy, tax revenue will likely be lower at the same time that public expenditures and demand for public services
increase. However, in the longer term, both the amount of revenue to be raised to finance federal expenditures and how that
revenue is raised will need to be carefully considered. Tax policy and the economy: In addition to affecting revenue, tax
policy will profoundly affect the economy as a whole and the decisions that individuals and businesses make about working,
saving, and investing in the coming years: The federal tax system includes „„numerous tax provisions intended to influence
taxpayers’ behavior throughout the economy, but still little is known about the effects of many of these provisions. These
tax expenditures—the special tax „„credits, deductions, deferrals, exclusions, and preferential tax rates provided under the
tax code that either reduce the flow of federal income taxes from individuals and corporations or that require higher tax
rates on other taxpayers to make up for lost revenue—need particular attention. The number of tax expenditures reported by
the Treasury has more than doubled since 1974, and the sum of revenue-loss estimates for tax expenditures was nearly $981
billion in 2009. Given the size and complexity of the „„federal tax code, tax reform will continue to be an area of particular
interest for the Congress and the federal government. Taxpayer compliance: Federal revenues also are reduced to the extent
that taxpayers do not fully comply with paying their tax liabilities. The most recent estimate of these net tax gaps is $290
billion. The IRS faces pressures to improve its taxpayer service to spur voluntary compliance, enforcement efforts to catch
noncompliance, and collections of tax debts. Significant improvements to compliance also will depend on innovative solutions
involving external parties, such as paid tax return preparers, and legislative changes, such as those to simplify the tax
code or mandate electronic filing. Enforcing tax laws and modernizing IRS business systems continue to be included in GAO’s
High-Risk List. GAO’s work will seek to ensure IRS improvement and inform other solutions to shrinking the tax gap. Financial
information: With the federal government facing serious fiscal challenges, the need is greater than ever for timely and accurate
financial information to measure and control costs, manage for results, and make fully informed program and resource allocation
decisions: Routinely generating „„ timely and reliable financial information will require transforming federal financial management
systems to focus on accounting for the full cost of programs and operations; integrating program, budget, and financial information;
and accounting for performance against established metrics. „„ It is essential that federal financial information be presented
in a form that is useful for deliberating on the nation’s budget, debt, and long-term fiscal challenges. „„Financial information
must be presented with a view toward better recognizing the unique elements of government operations, such as the extent of
the federal government’s social insurance commitments. GAO plans to focus its efforts on nearand longer-term opportunities
to improve the accuracy, timeliness, and usefulness of federal cost and other financial performance data; federal financial
management operations; and accounting, auditing, and internal control standards. The worsening fiscal position and outlook
calls for improvements in both congressional and agency information and processes to better illuminate the shortand long-term
value and costs of decisions and provide the context to help decision makers consider difficult trade-offs. To support efforts
by the Congress and the federal government to address these issues, GAO has established the following performance goals and
key efforts:
Indicator(s):
|
