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2013 Financial Report of the United States Government


A Citizen's Guide to the Fiscal Year 2013 Financial Report of the United States Government

Where We Are Headed

An important purpose of this Guide and the Financial Report is to help citizens understand current fiscal policy and the importance 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 Gross Domestic Product (GDP)4 (the debt-to-GDP ratio)is stable or declining over the long term. To determine if current fiscal policy is sustainable, the projections discussed in this Guide assume current policy will be sustained indefinitely and draw out the implications for the growth of the debt-to-GDP ratio5 . The projections are therefore neither forecasts nor predictions. As policy changes are enacted, actual financial outcomes will of course be different than those projected.

Receipts, Spending, and the Debt

Chart 5 shows historical and current policy projections for receipts, non-interest spending by major category, and total spending expressed as a percent of GDP. The difference between the receipts and non-interest spending shares of GDP (the primary deficit-to-GDP ratio) grew rapidly in 2009 due to the financial crisis, the recession, and the policies pursued to combat both. The ratio stayed large from 2010 to 2012, despite shrinking in each successive year, and fell significantly in 2013. The primary deficit is projected to shrink in the next few years as spending limits called for in the BCA take effect and the economy recovers, becoming a surplus starting in 2017 that peaks at 1.1 percent of GDP in 2021. Between 2022 and 2037, however, increased spending for Social Security and health programs6 due to continued aging of the population is expected to cause primary surpluses to steadily decline and become a deficit starting in 2029 that grows to 0.8 percent of GDP by 2036. After 2037, the projected primary deficit-to-GDP ratio slowly declines to 0.4 percent of GDP in 2088 as the impact of the baby boom generation retiring dissipates.

In these projections, the Affordable Care Act (ACA)7 provision of health insurance subsidies and expanded Medicaid coverage boost federal spending, and other ACA provisions significantly reduce per-beneficiary Medicare and Medicaid cost growth. Overall, the ACA is projected to substantially reduce the cost growth rate of federal expenditures for Medicare over the next 75 years. However, as noted in the Financial Report, there is uncertainty about the extent to which the ACAs provisions will result in reduced health care cost growth. Even if those provisions work as intended and as assumed in these projections, Chart 5 still shows a persistent gap between projected receipts and total non-interest spending.

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The primary deficit projections in Chart 5, along with those for interest rates and GDP, determine the debt-to-GDP ratio projections shown in Chart 6. That ratio was 72 percent at the end of FY 2013, and under current policy is projected to be 69 percent in 2023, 112 percent in 2043, and 277 percent in 2088. The continuous rise of the debt-to-GDP ratio after 2023 indicates that current policy is unsustainable

This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format.

The Fiscal Gap and the Cost of Delaying Policy Reform

It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require some combination of expenditure reductions and revenue increases that amount to 1.7 percent of GDP on average over the next 75 years. The timing of changes to non-interest spending and receipts that close this 75-year fiscal gap has important implications for the well-being of future generations. For example, relative to a policy that begins immediately, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap increases by more than 20 percent if action is delayed by 10 years and by more than 50 percent if action is delayed 20 years.

This year’s estimates of the magnitude of changes needed to close the 75-year fiscal gap, 1.7 percent of GDP, is down more than a third from the 2012 projection of 2.7 percent of GDP. The two largest factors behind the improvement are lower projected spending in Medicare and Medicaid and higher projected revenues (the latter reflecting the increases in high-income marginal tax rates enacted as part of the ATRA in January 2013).

Conclusion

The Government took significant steps towards fiscal sustainability by enacting the ACA in 2010, the BCA in 2011, and the ATRA in 2013. The ACA holds the prospect of lowering the long-term per beneficiary spending growth for Medicare and Medicaid, the BCA significantly curtails discretionary spending, and ATRA increased revenues. Together, these three laws substantially reduce the estimated long-term fiscal gap. But even with these new laws, the Government’s debt-to-GDP ratio is projected to remain flat over the next ten years, and then commence a continuous rise over the remaining projection period and beyond if current policy is kept in place. This trend implies that current policy is not sustainable. Subject to the important caveat that changes in policy are not so abrupt that they slow the economys recovery, the sooner policies are put in place to avert these trends, the smaller the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path 8.

Footnotes

4GDP measures the size of the Nation’s economy in terms of the total value of all final goods and services that are produced in a year. Considering financial results relative to GDP is a useful indicator of the economys capacity to sustain the Government’s many programs. In July 2013, the Bureau of Economic Analysis revised upward the historical values for GDP beginning with estimates for 1929. As a result, percentages or shares of GDP throughout the Financial Report are slightly lower than those reported in previous years.(Back to Content)
5Current 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.(Back to Content)
6The The 2013 Medicare Trustees Report projects that, assuming full implementation of the Affordable Care Act (ACA) provisions, the Hospital Insurance (HI) Trust Fund will remain solvent under current law until 2026 (two years later than reported last year), at which point the share of estimated HI costs that could be paid from trust fund income is 87 percent, declining to 73 percent by 2087. As for Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds are projected to be exhausted in 2033 (unchanged from last year), at which time the projected share of scheduled benefits payable from trust fund income is 77 percent, declining to 72 percent in 2087. The projections assume full Social Security and Medicare benefits are paid after the corresponding trust funds are exhausted. See http://www.ssa.gov/oact/trsum/index.html. (Back to Content)
7The ACA refers to P.L. 111-148, as amended by P.L. 111-152. The ACA expands health insurance coverage, provides health insurance subsidies for low-income individuals and families, includes many measures designed to reduce health care cost growth, and significantly reduces Medicare payment rates. (Back to Content)
8Further information about these fiscal projections and the underlying assumptions can be found in the Required Supplementary Information section of the Financial Report at http://www.fiscal.treasury.gov/fsreports/fs_reports_publications.htm.(Back to Content)

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